File Nos. 33-13021 and 811-5086
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. _______ [ ]
Post-Effective Amendment No. 17 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [ X ]
Amendment No. 18 [ X ]
CHURCHILL TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
380 Madison Avenue, Suite 2300
New York, New York 10017
(Address of Principal Executive Offices)
(212) 697-6666
(Registrant's Telephone Number)
EDWARD M.W. HINES
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone
551 Fifth Avenue, 27th Floor
New York, New York 10176
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check
appropriate box):
___
[___] immediately upon filing pursuant to paragraph (b)
[_X_] on (April 30, 1998) pursuant to paragraph (b)
[___] 60 days after filing pursuant to paragraph (a)(i)
[___] on (date) pursuant to paragraph (a)(i)
[___] 75 days after filing pursuant to paragraph (a)(ii)
[___] on (date) pursuant to paragraph (a)(ii) of Rule 485.
[___] This post-effective amendment designates a new effective
date for a previous post-effective amendment.
<PAGE>
CHURCHILL TAX-FREE TRUST
CROSS REFERENCE SHEET
Part A of
Form N-1A
Item No. Prospectus Caption(s)
1..............Cover Page
2..............Table of Expenses
3..............Financial Highlights; General Information
4..............Introduction; Highlights; Investment of the
Trust's Assets; Investment Restrictions;
General Information
5..............Management Arrangements
5A.............**
6..............General Information; Alternative Purchase
Plans; Dividend and Tax Information
7..............Net Asset Value per Share; Alternative
Purchase Plans; How to Invest in the Trust;
Exchange Privilege
8..............How to Redeem Your Investment; Automatic
Withdrawal Plan; Exchange Privilege
9..............*
Part B of
Form N-1A Statement of Additional Information
Item No. or Prospectus Caption(s)
10.............Cover Page
11.............Cover Page
12.............*
13.............Investment of the Trust's Assets; Municipal
Bonds; Investment Restrictions
14.............Trustees and Officers
15.............General Information;
Trustees and Officers
16.............Additional Information as to Management
Arrangements; General Information
17.............Additional Information as to Management
Arrangements
18.............General Information
19.............Limitations of Redemptions in Kind; Computation
of Net Asset Value; Automatic Withdrawal Plan;
Distribution Plan
20.............Additional Tax Information
21.............How to Invest in the Trust (Prospectus caption);
General Information
22.............Performance
* Not applicable or negative answer
** Contained in the annual report of the Registrant
<PAGE>
Churchill Tax-Free Fund of Kentucky
380 Madison Avenue, Suite 2300
New York, NY 10017
800-USA-KTKY (800-872-5859)
212-697-6666
Prospectus
Class A Shares
Class C Shares April 30, 1998
The Fund is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Kentucky
and Federal income taxes as is consistent with preservation of
capital by investing in municipal obligations which pay interest
exempt from Kentucky State and Federal income taxes. These
municipal obligations must, at the time of purchase, either be
rated within the four highest credit ratings (considered as
investment grade) assigned by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, or, if unrated, be determined to
be of comparable quality by the Fund's investment sub-adviser,
Banc One Investment Advisors Corporation.
This Prospectus concisely states information about the
Fund that you should know before investing. A Statement of
Additional Information about the Fund dated April 30, 1998, (the
"Additional Statement") has been filed with the Securities and
Exchange Commission and is available without charge upon written
request to the Fund's Shareholder Servicing Agent, at the address
given below, or by calling the telephone number(s) given below.
The Additional Statement contains information about the Fund and
its management not included in the Prospectus. The Additional
Statement is incorporated by reference in its entirety in the
Prospectus. Only when you have read both the Prospectus and the
Additional Statement are all material facts about the Fund
available to you.
SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY BANC ONE CORPORATION OR ITS BANK OR
NON-BANK AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE FUND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY OR GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT
OR ANY STATE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact
the Fund's Shareholder Servicing Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Call 800-872-5860 toll free
For General Inquiries & Yield Information,
Call 800-872-5859 toll free or 212-697-6666
This Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Churchill Tax-Free Fund of Kentucky
Jefferson Co. Hospital Revenue
Kenton Co. Airport Board
Hardin County Water District
Glasgow Electric Plant Board
Higher Ed. Student Loan Corp.
Higher Education
Ashland Utility District
Jefferson County Pollution Control
Kentucky Turnpike Authority
The Fund invests in tax-free municipal securities, primarily
the kinds of obligations issued by various communities and
political subdivisions within Kentucky. Most of these securities
are used to finance long-term municipal projects; examples are
pictured above. (See "Investment of the Fund's Assets.") The
municipal obligations which financed particular projects of which
these are typical, were included in the Fund's portfolio as of
April 1, 1998, and together represented 13.75% of the Fund's
portfolio. Since the portfolio is subject to change, the Fund may
not necessarily own these specific securities at the time of the
delivery of this Prospectus.
<PAGE>
HIGHLIGHTS
Churchill Tax-Free Fund of Kentucky, founded by Aquila
Management Corporation (the "Manager") in 1987 and one of the
Aquilasm Group of Funds, is an open-end mutual fund which invests
in tax-free municipal bonds, the kind of obligations issued by
the Commonwealth of Kentucky, its counties and various other
local authorities to finance such long-term public purpose
projects as schools, universities, housing, transportation,
utilities, hospitals and water and sewer facilities throughout
Kentucky. (See "Introduction.")
Tax-Free Income - The municipal obligations in which the
Fund invests pay interest which is exempt from regular Federal
income taxes and Commonwealth of Kentucky income and ad valorem
taxes. Dividends paid by the Fund from this income are likewise
free of such taxes. It is, however, possible that in certain
circumstances a small portion of the dividends paid by the Fund
will be subject to income taxes. The Federal alternative minimum
tax may apply to some investors, but its impact will be limited
since not more than 20% of the Fund's net assets can be invested
in obligations paying interest which is subject to this tax. The
receipt of exempt-interest dividends from the Fund may result in
some portion of social security payments or railroad retirement
benefits being included in taxable income. Capital gains
distributions, if any, are taxable. (See "Dividend and Tax
Information.")
Investment Grade - The Fund will acquire only those
municipal obligations which, at the time of purchase, are within
the four highest credit ratings assigned by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or are determined
by the Sub-Adviser to be of comparable quality. In general there
are nine separate credit ratings, ranging from the highest to the
lowest credit ratings for municipal obligations. Obligations
within the top four ratings are considered "investment grade,"
but those in the fourth rating may have speculative
characteristics as well. (See "Investment of the Fund's
Assets.")
Initial Investment - You may open your account with any
purchase of $1,000 or more or by opening an Automatic Investment
Program which makes purchases of $50 or more each month. (See the
Application, which is in the back of the Prospectus and "How to
Invest in the Fund," which includes applicable sales charge
information.)
Additional Investments - You may make additional investments
at any time and in any amount, directly or, if in an amount of
$50 or more, through the convenience of having your investment
electronically transferred from your financial institution
account into the Fund by Automatic Investment or Telephone
Investment. (See "How to Invest in the Fund.")
Alternative Purchase Plans - The Fund provides two
alternative ways for individuals to invest. (See "Alternative
Purchase Plans.") One way permits individual investors to pay
distribution and certain service charges principally at the time
they purchase shares; the other way permits investors to pay such
costs over a period of time, but without paying anything at time
of purchase, much as goods can be purchased on an installment
plan. For this purpose the Fund offers the following classes of
shares, which differ in their expense levels and sales charges:
* Front-Payment Class Shares ("Class A Shares") are
offered to anyone at net asset value plus a sales
charge, paid at the time of purchase, at the maximum
rate of 4.0% of the public offering price, with lower
rates for larger purchases. (See "How to Purchase
Class A Shares.") Class A Shares are subject to an
asset retention service fee under the Fund's
Distribution Plan at the rate of 0.15 of 1% of the
average annual net assets represented by the Class A
Shares. (See "Distribution Plan.")
* Level-Payment Class Shares ("Class C Shares") are
offered to anyone at net asset value with no sales
charge payable at the time of purchase but with a level
charge for service and distribution fees for six years
after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets of the Class C
Shares. (See "Distribution Plan" and "Shareholder
Services Plan for Class C Shares.") Six years after the
date of purchase, Class C Shares are automatically
converted to Class A Shares. If you redeem Class C
Shares before you have held them for 12 months from the
date of purchase you will pay a contingent deferred
sales charge ("CDSC"); this charge is 1%, calculated on
the net asset value of the Class C Shares at the time
of purchase or at redemption, whichever is less. There
is no CDSC after Class C Shares have been held beyond
the applicable period. (See "Alternative Purchase
Plans," "Computation of the Holding Periods for Class C
Shares" and "How to Purchase Class C Shares.")
The Fund also issues Institutional Class Shares ("Class Y
Shares") that are sold only to certain institutional investors
and Financial Intermediary Class Shares ("Class I Shares") which
are offered and sold only through certain financial
intermediaries. Class Y Shares and Class I Shares are not offered
by this Prospectus.
Class A Shares and Class C Shares are only offered for sale
in certain states. (See "How to Invest in the Fund.") If shares
of the Fund are sold outside those states the Fund can redeem
them. If your state of residence is not Kentucky, the dividends
from the Fund may be subject to income taxes of the state in
which you reside. Accordingly, you should consult your tax
adviser before acquiring shares of the Fund.
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends are paid by check mailed to
you, directly deposited into your financial institution account
or automatically reinvested without sales charge in additional
shares of the Fund at the then-current net asset value. Specific
classes of shares will have different dividend amounts due to
their particular expense levels. (See "Dividend and Tax
Information.")
Many Different Issues - You have the advantages of a
portfolio which consists of over 171 issues with different
maturities. (See "Investment of the Fund's Assets.")
Local Portfolio Management - Banc One Investment Advisors
Corporation (the "Sub-Adviser") serves as the Fund's investment
sub-adviser, providing experienced local professional management.
The Sub-Adviser is a wholly-owned subsidiary of BANC ONE
CORPORATION ("Banc One"), which currently has affiliate banking
organizations in Kentucky, Arizona, Colorado, Illinois, Indiana,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. On a consolidated basis, Banc One had assets of
approximately $115.9 billion as of December 31, 1997. As of July
1, 1997 the Sub-Adviser was responsible for management of over
$15 billion in municipal obligations, of which, $3.0 billion were
held in mutual funds and of which $343.1 million were obligations
of Kentucky issuers. The Sub-Adviser services Kentucky clients at
offices in Louisville and Lexington.
The Fund is obligated to pay investment advisory fees at
the rate of 0.40 of 1% of average annual net assets to its
Manager which pays fees at the annual rate of 0.14 of 1% of such
net assets to the Sub-Adviser. Both of these fees are subject to
increase were the Fund to discontinue certain payments under the
Distribution Plan, so that together these fees would be payable
at an aggregate annual rate of up to 0.50 of 1%. (See "Table of
Expenses," "Distribution Plan" and "Management Arrangements.")
Some or all of these fees may be waived by the Manager and the
Sub-Adviser. (See "Table of Expenses" and "Management
Arrangements.")
Redemptions - Liquidity - You may redeem any amount of your
account on any business day at the next determined net asset
value by telephone, FAX or mail request, with proceeds being sent
to a predesignated financial institution, if you have elected
Expedited Redemption. Proceeds will be wired or transferred
through the facilities of the Automated Clearing House, wherever
possible, upon request, if in an amount of $1,000 or more, or
will be mailed. For these and other redemption procedures see
"How to Redeem Your Investment." There are no penalties or
redemption fees for redemption of Class A Shares. However, there
is a contingent deferred sales charge with respect to certain
Class A Shares which have been purchased in amounts of $1 million
or more (see "Purchase of $1 Million or More"). If you redeem
Class C Shares before you have held them for 12 months from the
date of purchase you will pay a contingent deferred sales charge
("CDSC") at the rate of 1%. (See "Alternative Purchase Plans" -
"Class C Shares.")
Certain Stabilizing Measures - The Fund will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange Class A or Class C Shares of
the Fund into corresponding classes of shares of other
Aquila-sponsored tax-free municipal bond mutual funds or two
Aquila-sponsored equity funds. You may also exchange them into
shares of the Aquila-sponsored money market funds. The exchange
prices will be the respective net asset values of the shares.
(See "Exchange Privilege.")
Risks and Special Considerations - The share price,
determined on each business day, varies with the market prices of
the Fund's portfolio securities, which fluctuate with market
conditions including prevailing interest rates. Accordingly, the
proceeds of redemptions may be more or less than your original
cost. (See "Factors Which May Affect the Value of the Fund's
Investments and Their Yields.") The Fund's assets, being
primarily or entirely Kentucky issues, are subject to economic
and other conditions affecting Kentucky. (See "Risk Factors and
Special Considerations Regarding Investment in Kentucky
Obligations.") Moreover, the Fund is classified as a
"non-diversified" investment company, because it may choose to
invest in the obligations of a relatively limited number of
issuers. (See "Investment of the Fund's Assets.") The Fund may
also, to a limited degree, buy and sell futures contracts and
options on futures contracts, although since inception the Fund
has not done so and has no present intention to do so. There may
be risks associated with these practices. (See "Certain
Stabilizing Measures.")
Statements and Reports - You will receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you will receive a Semi-Annual
Report and an audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
TABLE OF EXPENSES
<S> <C> <C>
Class A Class C
Shareholder Transaction Expenses Shares Shares
Maximum Sales Charge Imposed on Purchases 4.00% None
(as a percentage of offering price)
Maximum Sales Charge Imposed on
Reinvested Dividends None None
Maximum Deferred Sales Charge None(1) 1.00%(2)
Redemption Fees None None
Exchange Fee None None
Annual Fund Operating Expenses (3) Arrangements effective May 1, 1998 (See
"Management Arrangements.")
(as a percentage of average annual net assets)
Management Fee (4) 0.40% 0.40%
12b-1 Fee 0.15% 0.75%
All other expenses (5) 0.18% 0.43%
Service Fee None 0.25%
Other Expenses (5) 0.18% 0.18%
Total Fund operating Expenses (5) 0.73% 1.58%
Example (6)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A Shares $47 $62 $79 $127
Class C Shares
With complete redemption
at end of period $26 $50 $86 $144 (7)
With no redemption $16 $50 $86 $144 (7)
<FN>
(1) Certain shares purchased in transactions of $1 million or more without
a sales charge may be subject to a contingent deferred sales charge of up
to 1% upon redemption during the first four years after purchase. See
"Purchase of $1 Million or More".
</FN>
<FN>
(2) A contingent deferred sales charge of 1% is imposed on the redemption
proceeds of the shares (or on the original price, whichever is lower) if
redeemed during the first 12 months after purchase.
</FN>
<FN>
(3) Estimated based upon expenses incurred by the Fund during its most
recent fiscal year, restated to reflect current arrangements.
</FN>
<FN>
(4) The Fund pays the Manager an advisory fee at the annual rate of 0.40 of 1%
of average annual net assets; the Manager pays the Sub-Adviser a sub-advisory
fee at the annual rate of 0.14 of 1% of average annual net assets. (See
"Management Arrangements.")
</FN>
<FN>
(5) Does not reflect a 0.01% expense offset in custodian fees received
for uninvested cash balances. Reflecting this offset, other expenses,
all other expenses, and total Fund operating expenses for Class A Shares
would have been 0.17%, 0.17% and 0.72%, respectively; for Class C Shares, these
expenses would have been 0.17%, 0.42% and 1.57%, respectively.
</FN>
<FN>
(6) The expense example is based upon the above shareholder transaction
expenses (in the case of Class A Shares, this includes a sales charge of
$40 for a $1,000 investment) and estimated annual Fund operating expenses. It
is also based upon amounts at the beginning of each year which includes the
prior year's assumed results. A year's results consist of an assumed 5%
annual return less total operating expenses; the expense ratio was applied
to an assumed average balance (the year's starting investment plus one-half
the year's results). Each figure represents the cumulative expenses so
determined for the period specified.
</FN>
<FN>
(7) Six years after the date of purchase, Class C Shares are automatically
converted to Class A Shares. Because of the effect of the asset-based 12b-1 fee
and service fee on Class C Shares, long-term Class C shareholders could pay the
economic equivalent of an amount greater than the maximum front-end sales
charge allowed under applicable regulations.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL MUTUAL FUNDS
USE THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING THE ABOVE
EXAMPLE. THE ASSUMED 5% ANNUAL RETURN SHOULD NOT BE INTERPRETED AS A
PREDICTION OF AN ACTUAL RETURN, WHICH MAY BE HIGHER OR LOWER. THE EXAMPLE
ALSO REFLECTS THE MAXIMUM SALES CHARGE. (SEE "HOW TO INVEST IN THE FUND").
The purpose of the above table is to assist the investor in understanding
the various costs that an investor in the Fund will bear directly or
indirectly.
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights as it relates to the
five years ended December 31, 1997 has been audited by KPMG Peat Marwick
LLP, independent auditors, whose report thereon is included with the Fund's
financial statements contained in its Annual Report, which are incorporated
by reference into the Additional Statement. The information provided in the
table should be read in conjunction with the financial statements and
related notes. The Fund's Annual Report contains additional information
about the Fund's performance and is available upon request without charge.
On October 16, 1989, Aquila Management Corporation, originally the Fund's
Sub-Adviser and Administrator, became Administrator only. Effective
September 11, 1995, Banc One Investment Advisors Corporation became the
Fund's Investment Adviser, replacing PNC Bank, Kentucky, Inc. ("See
Management Arrangements").
Class A(3) Class C(4)
Year Ended December 31, Year Ended Period Ended
1997 1996 1995 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.55 $10.71 $9.97 $10.55 $10.47
Income from Investment
Operations:
Net investment
income............... 0.55 0.55 0.60 0.46 0.37
Net gain (loss) on
securities (both
realized and
unrealized).......... 0.27 (0.12) 0.74 0.27 0.11
Total from Investment
Operations........... 0.82 0.43 1.34 0.73 0.48
Less Distributions:
Dividends from
net investment
income............... (0.55) (0.59) (0.60) (0.46) (0.40)
Distributions from
capital gains........ (0.01) - - (0.01) -
Total Distributions.. (0.56) (0.59) (0.60) (0.47) (0.40)
Net Asset Value,
End of Period $10.81 $10.55 $10.71 $10.81 $10.55
Total Return (not
reflecting
sales charge)(%)........ 8.08 4.17 13.75 7.16 4.72(1)
Ratios/Supplemental Data
Net Assets, End of
Period ($ in thousands) 226,477 222,889 230,270 845 433
Ratio of Expenses
to Average Net
Assets(%)............ 0.72 0.74 0.79 1.56 1.55(2)
Ratio of Net Investment
Income to Average Net
Assets(%)............ 5.20 5.23 5.75 4.31 4.35(2)
Portfolio Turnover
Rate(%)................. 22.39 8.94 17.09 22.39 8.94
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and
the expense offset in custodian fees for uninvested cash balances would
have been:
Net Investment
Income($).............. 0.55 0.55 0.60 0.46 0.37
Ratio of Expenses
to Average Net
Assets.(%)............. 0.73 0.75 0.80 1.57 1.56(2)
Ratio of Net Investment
Income to Average
Net Assets(%).......... 5.19 5.22 5.74 4.30 4.34(2)
<CAPTION>
1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C>
$10.93 $10.49 $10.39 $10.00 $10.06 $9.53 $9.26
0.60 0.62 0.66 0.66 0.65 0.68 0.65
(0.96) 0.47 0.19 0.41 (0.03) 0.53 0.26
(0.36) 1.09 0.85 1.07 0.62 1.21 0.91
(0.60) (0.62) 0.66 (0.66) (0.68) (0.68) (0.64)
- (0.03) (0.09) (0.02) - - -
(0.60) (0.65) (0.75) (0.68) (0.68) (0.68) (0.64)
$9.97 $10.93 $10.49 $10.39 $10.00 $10.06 $9.53
(3.31) 10.50 8.48 10.97 6.64 13.09 $10.49
232,656 258,632 192,600 114,798 66,076 35,652 19,007
0.72 0.59 0.42 0.27 0.10 0.08 0.10
5.81 5.67 6.21 6.53 6.60 6.94 6.87
35.25 31.29 50.33 16.69 7.67 3.63 10.51
0.60 0.60 0.63 0.60 0.59 0.57 0.58
0.73 0.73 0.68 0.84 0.76 1.09 1.21
5.80 5.52 5.95 5.96 5.94 5.92 5.79
<FN>
(1)Not annualized.
</FN>
<FN>
(2)Annualized.
</FN>
<FN>
(3) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(4) New Class of Shares established on April 1, 1996.
</FN>
<FN>
*For the period from April 1, 1996 to December 31, 1996.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment
for investors who seek income exempt from Kentucky State and
regular Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Kentucky Obligations, as defined below,
which may include obligations of certain non-Kentucky issuers.
The Fund offers you the opportunity to keep assets fully invested
in a vehicle that provides a professionally managed portfolio of
Kentucky Obligations which may, but not necessarily will, be more
diversified, higher yielding or more stable and more liquid than
you might be able to obtain on an individual basis by direct
purchase of Kentucky Obligations. Through the convenience of a
single security consisting of shares of the Fund, you are also
relieved of the inconvenience associated with direct investments
of fixed denominations, including the selecting, purchasing,
handling, monitoring call provisions and safekeeping of Kentucky
Obligations.
Kentucky Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes;
bond anticipation notes; construction loan notes; and floating
and variable rate demand notes. Municipal obligations include
municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment. The
purposes for which municipal obligations such as bonds are issued
include the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing,
mass transportation, streets and water and sewer works. Other
public purposes for which municipal obligations may be issued
include the refunding of outstanding obligations, the obtaining
of funds for general operating expenses and the obtaining of
funds to lend to other public institutions and facilities.
INVESTMENT OF THE FUND'S ASSETS
In seeking its objective of providing as high a level of
current income which is exempt from both Kentucky State and
regular Federal income taxes as is consistent with the
preservation of capital, the Fund will invest in Kentucky
Obligations (as defined below). There is no assurance that the
Fund will achieve its objective, which is a fundamental policy of
the Fund. (See "Investment Restrictions.")
As used in the Prospectus and the Additional Statement, the
term "Kentucky Obligations" means obligations, including those of
certain non-Kentucky issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate
counsel, is exempt from regular Federal income taxes and Kentucky
income taxes. Although exempt from regular Federal income tax,
interest paid on certain types of Kentucky Obligations, and
dividends which the Fund might pay from this interest, are
preference items as to the Federal alternative minimum tax; for
further information, see "Dividend and Tax Information." As a
fundamental policy, at least 80% of the Fund's net assets will be
invested in Kentucky Obligations the income paid upon which will
not be subject to the alternative minimum tax; accordingly, the
Fund can invest up to 20% of its net assets in obligations which
are subject to the Federal alternative minimum tax. The Fund may
refrain entirely from purchasing these types of Kentucky
Obligations. (See "Dividend and Tax Information.")
The non-Kentucky bonds or other obligations the interest on
which is exempt under present law from regular Federal and
Kentucky income taxes are those issued by or under the authority
of Guam, the Northern Mariana Islands, Puerto Rico and the Virgin
Islands. The Fund will not purchase Kentucky Obligations of
non-Kentucky issuers unless Kentucky Obligations of Kentucky
issuers of the desired quality, maturity and interest rate are
not available. As a Kentucky-oriented fund, at least 65% of the
Fund's total assets will be invested in Kentucky Obligations of
Kentucky issuers. The Fund invests only in Kentucky Obligations
and, possibly, in Futures and options on Futures (see below) for
protective (hedging) purposes.
In general, there are nine separate credit ratings,
ranging from the highest to the lowest quality standards for
municipal obligations. So that the Fund will have a portfolio of
quality oriented (investment grade) securities, the Kentucky
Obligations which the Fund will purchase must, at the time of
purchase, either (i) be rated within the four highest credit
ratings assigned by Moody's Investors Service, Inc. ("Moody's")
or Standard & Poor's Corporation ("S&P"); or (ii) if unrated, be
determined to be of comparable quality to municipal obligations
so rated by Banc One Investment Advisors Corporation (the
"Sub-Adviser"), subject to the direction and control of the
Fund's Board of Trustees. Municipal obligations rated in the
fourth highest credit rating are considered by such rating
agencies to be of medium quality and thus may present investment
risks not present in more highly rated obligations. Such bonds
lack outstanding investment characteristics and may in fact have
speculative characteristics as well; changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is
the case for higher grade bonds. If after purchase the rating of
any rated Kentucky Obligation is downgraded such that it could
not then be purchased by the Fund, or, in the case of an unrated
Kentucky Obligation, if the Sub-Adviser determines that the
unrated obligation is no longer of comparable quality to those
rated obligations which the Fund may purchase, it is the current
policy of the Fund to cause any such obligation to be sold as
promptly thereafter as the Sub-Adviser in its discretion
determines to be consistent with the Fund's objectives; such
obligation remains in the Fund's portfolio until it is sold. In
addition, because a downgrade often results in a reduction in the
market price of a downgraded obligation, sale of such an
obligation may result in a loss. (See Appendix A to the
Additional Statement for further information as to these
ratings.) The Fund can purchase industrial development bonds only
if they meet the definition of Kentucky Obligations, i.e., the
interest on them is exempt from Kentucky State and regular
Federal income taxes.
The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940
Act"). The Fund also intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code"). One of the tests for such qualification under the
Code is, in general, that at the end of each fiscal quarter of
the Fund, at least 50% of its assets must consist of (i) cash;
and (ii) securities which, as to any one issuer, do not exceed 5%
of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment
company, it would have to meet a similar test as to 75% of its
assets. The Fund may therefore not have as much diversification
among securities, and thus diversification of risk, as if it had
made this election under the 1940 Act. In general, the more the
Fund invests in the securities of specific issuers, the more the
Fund is exposed to risks associated with investments in those
issuers. The Fund's assets, being primarily or entirely Kentucky
issues, are accordingly subject to economic and other conditions
affecting Kentucky. (See "Risk Factors and Special Considerations
Regarding Investment in Kentucky Obligations.")
Certain Stabilizing Measures
The Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash
and cash equivalents in attempting to protect against declines in
the value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Fund has no current intention of using futures and options,
to the limited degree described below, these may be used to
attempt to hedge against changes in the market price of the
Fund's Kentucky Obligations caused by interest rate fluctuations.
Futures and options could also provide a hedge against increases
in the cost of securities the Fund intends to purchase.
Although it does not currently do so, and since inception
has not done so, the Fund may buy and sell futures contracts
relating to indices on municipal bonds ("Municipal Bond Index
Futures") and to U.S. government securities ("U.S. Government
Securities Futures"); both kinds of futures contracts are
"Futures." The Fund may also write and purchase put and call
options on Futures. As a matter of fundamental policy the Fund
will not buy or sell a Future or an option on a Future if
thereafter more than 10% of its net assets would be in initial or
variation margin on such Futures and options on them, and in
premiums on such options. The Fund will not enter into Futures or
options for which the aggregate initial margins and premiums paid
for options exceed 5% of the fair market value of the Fund's
assets. (See the Additional Statement.) Under normal market
conditions, the Fund cannot purchase or sell Municipal Bond Index
Futures, U.S. Government Securities Futures, or options on
Futures if thereafter more than 20% of its total assets would
consist of cash, margin deposits on such Futures and margin
deposits and premiums on such options, except for temporary
defensive purposes, i.e., in anticipation of a decline or
possible decline in the value of Kentucky Obligations.
The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and
the prices of Futures or options purchased or sold by the Fund;
(ii) incorrect forecasts by the Sub-Adviser concerning interest
rates which may result in the hedge being ineffective; and (iii)
possible lack of a liquid secondary market for a Future or
option; the resulting inability to close a Futures or options
position could adversely affect the Fund's hedging ability. For
a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security
being hedged. The risk of imperfect correlation of these price
changes is increased as the composition of the Fund's portfolio
is divergent from the debt securities underlying the hedging
instrument. To date, the Sub-Adviser has had no experience in the
use of Futures or options on them.
The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits"
established by commodity exchanges which restrict the amount of
change in the contract price allowed during a single trading day.
Thus, once a daily limit is reached, no further trades may be
entered into beyond the limit, thereby preventing the liquidation
of open positions. Prices have in the past reached the daily
limit on a number of consecutive trading days. For further
information about Futures and options, see the Additional
Statement.
When and if the Fund determines to use Futures and options,
the Prospectus will be supplemented.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one
year, but permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each
case upon not more than 30-days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days'
notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is
adjusted automatically at specified intervals.
Participation Interests
The Fund may purchase from financial institutions
participation interests in Kentucky Obligations (such as
industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided
interest in the underlying Kentucky Obligations in the proportion
that the Fund's participation interest bears to the total amount
of the underlying Kentucky Obligations. All such participation
interests must meet the Fund's credit requirements. (See
"Limitation to 10% as to Certain Investments.")
When-Issued and Delayed Delivery Purchases
The Fund may buy Kentucky Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring
them. The Kentucky Obligations so purchased are subject to market
fluctuation and no interest accrues to the Fund until delivery
and payment take place; their value at the delivery date may be
less than the purchase price. The Fund cannot enter into
when-issued commitments exceeding in the aggregate 15% of the
market value of the Fund's total assets, less liabilities other
than the obligations created by when-issued commitments. If the
Fund chooses to dispose of the right to acquire a when-issued
obligation prior to its acquisition, it could, as with the
disposition of any other portfolio holding, incur a gain or loss
due to market fluctuation; any such gain would be a taxable
short-term gain. The Fund places an amount of assets equal in
value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account, which is marked to market every business day.
(See the Additional Statement for further information.)
Limitation to 10% as to Certain Investments
The Fund cannot purchase Kentucky Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does
not include any Kentucky Obligations as to which the Fund can
exercise the right to demand payment in full within three days
and as to which there is a secondary market. Floating and
variable rate demand notes and participation interests (including
municipal lease/purchase obligations) are considered illiquid
unless determined by the Board of Trustees to be readily
marketable. (See the Additional Statement.)
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets
in (i) Kentucky Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.
Factors Which May Affect the Value of the
Fund's Investments and Their Yields
The value of the Kentucky Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Fund buys Kentucky Obligations, the value
of these obligations will normally go down; if these rates go
down, the value of these obligations will normally go up. Changes
in value and yield based on changes in prevailing interest rates
may have different effects on short-term Kentucky Obligations
than on long-term obligations. Long-term obligations (which often
have higher yields) may fluctuate in value more than short-term
ones. For this reason, the Fund may, to achieve a defensive
position, shorten the average maturity of its portfolio.
Risk Factors and Special Considerations
Regarding Investment in Kentucky Obligations
The following is a discussion of the general factors that
might influence the ability of Kentucky issuers to repay
principal and interest when due on the Kentucky Obligations
contained in the portfolio of the Fund. Such information is
derived from sources that are generally available to investors
and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.
The Commonwealth of Kentucky continues to rank among the
top coal producers in the country. Tobacco is the dominant
agricultural product. Kentucky ranks second among the states in
the total cash value of tobacco raised. There is significant
diversification in the manufacturing sector of the Commonwealth's
economy. A few examples include the production of automobiles and
trucks, heavy machinery and other durable goods, appliances and
computer equipment. There has been recent growth in auto
parts/components producers that supply the Toyota Motors facility
in Georgetown, Kentucky. Tobacco processing plants and
distilleries produce items for export throughout the world.
Thoroughbred horse breeding and racing are important to the
economy, as is tourism.
Economic problems include a continuing high unemployment
rate in the non-urbanized areas of the State. The Coal Severance
Tax is a significant revenue producer for the state and its
political subdivisions, and any substantial decrease in the
amount of coal or other minerals produced could result in revenue
shortfalls. Additionally, any federal legislation affecting
adversely the tobacco and/or cigarette industry would have a
negative impact on Kentucky's economy. Although revenue
obligations of the state or its political subdivisions may be
payable from a specific project, there can be no assurances that
further economic difficulties and the resulting impact on state
and local government finances will not adversely affect the
market value of the bonds issued by Kentucky municipalities or
political subdivisions or the ability of the respective entities
to pay debt service. Major legislative initiatives in the area of
education reform and medicaid expenses are having an impact on
the Commonwealth's financial profile.
The Commonwealth of Kentucky relies upon sales and use tax,
individual income tax, property tax, corporate income tax,
insurance premium tax, alcohol beverage tax, corporate license
tax, cigarette tax, and horse racing tax for its revenue. The
cities, counties and other local governments are essentially
limited to property taxes, occupational license taxes, utility
taxes, transit and restaurant meals taxes and various license
fees for their revenue. Obligations of non-Kentucky issuers are
subject to the risks of general economic and other factors
affecting those issuers.
Because of constitutional limitations, the Commonwealth of
Kentucky cannot enter into a financial obligation of more than
two years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than
one year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal
revenue bonds in other States. See the Additional Statement.
INVESTMENT RESTRICTIONS
The Fund has a number of policies about what it can and
cannot do. Certain of these policies, identified in the
Prospectus and in the Additional Statement as "fundamental
policies," cannot be changed unless the holders of a "majority,"
as defined in the 1940 Act, of the Fund's outstanding shares vote
to change them. (See the Additional Statement for a definition of
such a majority.) All other policies can be changed from time to
time by the Board of Trustees without shareholder approval. Some
of the more important of the Fund's fundamental policies, not
otherwise identified in the Prospectus, are set forth below;
others are listed in the Additional Statement.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than the Kentucky
Obligations meeting the standards stated under "Investment of the
Fund's Assets"; the Fund can also purchase and sell Futures and
options on them within the limits there discussed.
2. The Fund has industry investment requirements.
The Fund cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry; the Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Fund cannot make loans.
The Fund can buy those Kentucky Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.
4. The Fund can borrow only in limited amounts for special
purposes.
The Fund can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage
or pledge its assets only in connection with such borrowing and
only up to the lesser of the amounts borrowed or 5% of the value
of its total assets. However, this shall not prohibit margin
arrangements in connection with the purchase or sale of Municipal
Bond Index Futures, U.S. Government Securities Futures or options
on them, or the payment of premiums on those options. Interest on
borrowings would reduce the Fund's income. Except in connection
with borrowings, the Fund will not issue senior securities. The
Fund will not purchase any Kentucky Obligations, Futures or
options on Futures while it has any outstanding borrowings which
exceed 5% of the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York time,
on each day that the New York Stock Exchange is open (a "business
day"), by dividing the value of the Fund's net assets (i.e., the
value of the assets less liabilities) allocable to each class by
the total number of shares of such class then outstanding.
Determination of the value of the Fund's assets is subject to the
direction and control of the Fund's Board of Trustees. In
general, it is based on market value, except that Kentucky
Obligations maturing in 60 days or less are generally valued at
amortized cost; see the Additional Statement for further
information.
ALTERNATIVE PURCHASE PLANS
In this Prospectus the Fund provides you with two
alternative ways to invest in the Fund through two separate
classes of shares. All classes represent interests in the same
portfolio of Kentucky Obligations. The classes of shares offered
to individuals differ in their sales charge structures and
ongoing expenses, as described below. You should choose the class
that best suits your own circumstances and needs.
If you choose to purchase Class A Shares you will pay the
applicable sales charge at the time of your purchase. By
purchasing Class C Shares, you will pay a sales charge over a
period of six years after purchase but without paying anything at
time of purchase, much as goods can be purchased on an
installment plan. You are subject to a contingent deferred sales
charge, described below, but only if you redeem your Class C
Shares before they have been held 12 months from your purchase.
(See "Computation of Holding Periods for Class C Shares.")
Class A Shares, "Front-Payment Class Shares," are
offered to anyone at net asset value plus a sales
charge, paid at the time of purchase, at the maximum
rate of 4.0% of the public offering price, with lower
rates for larger purchases. When you purchase Class A
Shares, the amount of your investment is reduced by the
applicable sales charge. Class A Shares are subject to
an asset retention service fee under the Fund's
Distribution Plan at the rate of 0.15 of 1% of the
average annual net assets represented by the Class A
Shares. Certain Class A Shares purchased in
transactions of $1 million or more are subject to a
contingent deferred sales charge. (See "Purchase of $1
Million or More.")
Class C Shares, "Level-Payment Class Shares," are
offered to anyone at net asset value with no sales
charge payable at purchase but with a level charge for
distribution fees and service fees for six years after
the date of purchase at the aggregate annual rate of 1%
of the average annual net assets represented by the
Class C Shares. (See "Distribution Plan" and
"Shareholder Services Plan for Class C Shares.") Six
years after the date of purchase, Class C Shares,
including Class C Shares acquired in exchange for other
Class C Shares under the Exchange Privilege (see
"Exchange Privilege"), are automatically converted to
Class A Shares. If you redeem Class C Shares before you
have held them for 12 months from the date of purchase
you will pay a contingent deferred sales charge
("CDSC") at the rate of 1%, calculated on the net
asset value of the redeemed Class C Shares at the time
of purchase or of redemption, whichever is less. The
amount of any CDSC will be paid to the Distributor. The
CDSC does not apply to shares acquired through the
reinvestment of dividends on Class C Shares or to any
Class C Shares held for more than 12 months after
purchase. For purposes of applying the CDSC and
determining the time of conversion, the 12-month and
six-year holding periods are considered modified by up
to one month depending upon when during a month your
purchase of such shares is made. (See "Computation of
Holding Periods for Class C Shares" and "How to
Purchase Class C Shares.")
In determining whether a CDSC is payable on a redemption of
Class C Shares, it will be assumed that the redemption is made
first of any shares acquired as dividends or distributions,
second of any Class C Shares you have held for more than 12
months from the date of purchase and finally of those Class C
Shares as to which the CDSC is payable which you have held the
longest. This will result in your paying the lowest possible
CDSC.
Computation of Holding Periods for Class C Shares
For purposes of determining the holding period for Class C
Shares, all of your purchases made during a calendar month will
be deemed to have been made on the first business day of that
month at the average cost of all purchases made during that
month. The 12-month CDSC holding period will end on the first
business day of the 12th calendar month after the date your
purchase is deemed to have been made. Accordingly, the CDSC
holding period applicable to your Class C Shares may be up to one
month less than the full 12 months depending upon when your
actual purchase was made during a month. Running of the 12-month
CDSC holding period will be suspended for one month for each
period of thirty days during which you have held shares of a
money market fund you have received in exchange for Class C
Shares under the Exchange Privilege. (See "Exchange Privilege.")
Your Class C Shares will automatically convert to Class A
Shares six years after the date of purchase, together with a
pro-rata portion of all Class C Shares representing dividends and
other distributions paid in additional Class C Shares. The Class
C Shares so converted will no longer be subject to the higher
expenses borne by the Class C Shares. The conversion will be
effected at relative net asset values on the first business day
of the month following that in which the sixth anniversary of
your purchase of the Class C Shares occurred, except as noted
below. Accordingly, the holding period applicable to your Class C
Shares may be up to one month more than the six years depending
upon when your actual purchase was made during a month. Because
the per share value of Class A Shares may be higher than that of
Class C Shares at the time of conversion, you may receive fewer
Class A Shares than the number of Class C Shares converted. If
you have made one or more exchanges of Class C Shares among the
Aquila-sponsored tax-free municipal bond funds or equity funds
under the Exchange Privilege, the six-year holding period is
deemed to have begun on the date you purchased your original
Class C Shares of the Fund or of another of the Aquila bond or
equity funds. The six-year holding period will be suspended by
one month for each period of thirty days during which you hold
shares of a money market fund you have received in exchange for
Class C Shares under the Exchange Privilege. (See "Exchange
Privilege.")
The following chart summarizes the principal differences
between Class A Shares and Class C Shares.
<TABLE>
<CAPTION>
Class A Class C
<S> <C> <C>
Initial Sales Maximum of 4% of the None
Charge public offering price
Contingent Deferred None (except for certain Maximum CDSC of 1% if
Sales Charge purchases over $1 Million) shares redeemed before
12 months; 0% after 12
months
Distribution and 0.15 of 1% Distribution fee of
Service Fees 0.75 of 1% and a
service fee of 0.25 of
1% for a total of 1%,
payable for six years
Other Information Initial Sales Charge waived Shares convert to
Class or reduced in some cases A Shares after
six years
</TABLE>
Factors to Consider in Choosing Classes of Shares
This discussion relates to the major differences between
Class A Shares and Class C Shares. It is recommended that any
investment in the Fund be considered long-term in nature.
Over time, the cumulative total cost of the 1% annual
service and distribution fees on the Class C Shares will equal or
exceed the total cost of the initial 4% maximum initial sales
charge and 0.15 of 1% annual fee payable for Class A Shares. For
example, if equal amounts were paid at the same time for Class A
Shares (where the amount invested is reduced by the amount of the
sales charge) and for Class C Shares (which carry no sales charge
at the time of purchase) and the net asset value per share
remained constant over time, the total of such costs for Class C
Shares would equal the total of such costs for Class A Shares
after approximately four and two-thirds years. This example
assumes no redemptions and disregards the time value of money.
Purchasers of Class C Shares have all of their investment dollars
invested from the time of purchase, without having their
investment reduced at the outset by the initial sales charge
payable for Class A Shares. If you invest in Class A Shares you
will pay the entire sales charge at the time of purchase.
Accordingly, if you expect to redeem your shares within a
reasonably short time after purchase, you should consider the
total cost of such an investment in Class A Shares compared with
a similar investment in Class C Shares. The example under "Table
of Expenses" shows the effect of Fund expenses for both classes
if a hypothetical investment in each of the classes is held for
1, 3, 5 and 10 years. (See the Table of Expenses.)
Dividends and other distributions paid by the Fund with
respect to shares of each class are calculated in the same manner
and at the same time. The dividends actually paid with respect to
Class C Shares will be lower than those paid on Class A because
Class C Shares bear higher distribution and service fees and will
have a higher expense ratio. In addition, the dividends of each
class can vary because each class will bear certain
class-specific charges. For example, each class will bear the
costs of printing and mailing annual reports to its own
shareholders.
HOW TO INVEST IN THE FUND
The Fund's shares may be purchased through any investment
broker or dealer (a "selected dealer") which has a sales
agreement with Aquila Distributors, Inc. (the "Distributor") or
through the Distributor. There are two ways to make an initial
investment: (i) order the shares through your investment broker
or dealer, if it is a selected dealer; or (ii) mail the
Application with payment to the Fund's Shareholder Servicing
Agent (the "Agent") at the address on the Application. If you
purchase Class A Shares, the applicable sales charge will apply
in either instance. Subsequent investments are also subject to
the applicable sales charges. You are urged to complete an
Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment. Unless your initial investment is specified to be
made in Class C Shares, it will be made in Class A Shares.
The minimum initial investment for Class A Shares and Class
C Shares is $1,000, except as otherwise stated in the Prospectus
or Additional Statement. You may also make an initial investment
of at least $50 by establishing an Automatic Investment Program.
To do this you must open an account for automatic investments of
at least $50 each month and make an initial investment of at
least $50. (See below and "Automatic Investment Program" in the
Application.) Such investment must be drawn in United States
dollars on a United States commercial or savings bank, a credit
union or a United States branch of a foreign commercial bank
(each of which is a "Financial Institution"). You may make
subsequent investments in the same class of shares in any amount
(unless you have an Automatic Withdrawal Plan). Your subsequent
investment may be made through a selected dealer or by forwarding
payment to the Agent, with the name(s) of account owner(s), the
account number, the name of the Fund and the class of shares to
be purchased. With subsequent investments, please send the
pre-printed stub attached to the Fund's confirmations.
Subsequent investments of $50 or more in shares of the same
class as your initial investment can be made by electronic funds
transfer from your demand account at a Financial Institution. To
use electronic funds transfer for your purchases, your Financial
Institution must be a member of the Automated Clearing House and
the Agent must have received your completed Application
designating this feature, or, after your account has been opened,
a Ready Access Features form available from the Distributor or
the Agent. A pre-determined amount can be regularly transferred
for investment ("Automatic Investment"), or single investments
can be made upon receipt by the Agent of telephone instructions
from anyone ("Telephone Investment"). The maximum amount of each
Telephone Investment is $50,000. Upon 30 days' written notice to
shareholders, the Fund may modify or terminate these investment
methods at any time or charge a service fee, although no such fee
is currently contemplated.
The offering price is the net asset value per share for
Class C Shares and the net asset value per share plus the
applicable sales charge for Class A Shares. The offering price
determined on any day applies to all purchase orders received by
the Agent from selected dealers that day, except that orders
received by it after 4:00 p.m. New York time will receive that
day's offering price only if such orders were received by
selected dealers from customers prior to such time and
transmitted to the Distributor prior to its close of business
that day (normally 5:00 p.m. New York time); if not so
transmitted, such orders will be filled at the next determined
offering price. Selected dealers are required to transmit orders
promptly. Investments by mail are made at the offering price next
determined after receipt of the purchase order by the Agent.
Purchase orders received on other than a business day will be
executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day, except that if that day is not a business
day, your order will be executed at the price determined on the
next business day. In the case of Telephone Investment your order
will be filled at the next determined offering price. If your
order is placed after the time for determining the net asset
value of the Fund shares for any day it will be executed at the
price determined on the following business day. The sale of
shares will be suspended during any period when the determination
of net asset value is suspended. The Fund and the Distributor
reserve the right to reject any order for the purchase of shares.
In addition, the offering of shares may be suspended at any time
and resumed at any time thereafter.
At the date of the Prospectus, Class A Shares and Class C
Shares of the Fund are available only in the following states:
Kentucky, Alabama, District of Columbia, Florida, Georgia,
Hawaii, Illinois, Indiana, Missouri, New Jersey, New York, Ohio,
Pennsylvania and Tennessee. Class A Shares are also available in
Texas.
If you do not reside in one of these states you should
not purchase shares of the Fund. If Class A Shares or Class C
Shares of the Fund are sold outside of these states the Fund can
redeem them. Such a redemption may result in a loss to you and
may have tax consequences. In addition, if your state of
residence is not Kentucky, the dividends from the Fund may not be
exempt from income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Fund.
How to Purchase Class A Shares
(Front-Payment Class Shares)
The following table shows the amount of the sales charge
to a "single purchaser" (defined below) together with the dealer
discounts paid to dealers and the agency commissions paid to
brokers (collectively called the "commissions") for Class A
Shares:
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as Commissions
Percentage of Approximate as
Amount of Public Offering Percentage of Percentage of
Purchase Price Amount Invested Offering Price
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 but less
than $50,000 3.75% 3.90% 3.50%
$50,000 but less
than $100,000 3.50% 3.63% 3.25%
$100,000 but less
than $250,000 3.25% 3.36% 3.00%
$250,000 but less
than $500,000 3.00% 3.09% 2.75%
$500,000 but less
than $1,000,000 2.50% 2.56% 2.25%
</TABLE>
For purchases of $1 million or more see "Purchase of $1 Million
or More," below.
The table of sales charges is applicable to purchases of
Class A Shares by a "single purchaser," i.e.: (a) an individual;
(b) an individual together with his or her spouse and their
children under the age of 21 purchasing Class A Shares for his,
her or their own accounts; (c) a trustee or other fiduciary
purchasing Class A Shares for a single trust estate or a single
fiduciary account; and (d) a tax-exempt organization enumerated
in Section 501(c)(3) or (13) of the Code.
Upon notice to all selected dealers, the Distributor may
reallow up to the full amount of the applicable sales charge as
shown in the above schedule during periods specified in such
notice. During periods when all or substantially all of the
entire sales charge is reallowed, such selected dealers may be
deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Purchase of $1 Million or More
Class A Shares issued under the following circumstances
are called "CDSC Class A Shares": (i) Class A Shares issued in a
single purchase of $1 million or more by a single purchaser; and
(ii) all Class A Shares issued in a single purchase to a single
purchaser the value of which, when added to the value of the CDSC
Class A Shares and Class A Shares on which a sales charge has
been paid, already owned at the time of such purchase, equals or
exceeds $1 million. CDSC Class A Shares also include certain
Class A Shares issued under the program captioned "Special Dealer
Arrangements," below. CDSC Class A Shares do not include (i)
Class A Shares purchased without sales charge pursuant to the
terms described under "General," below and (ii) Class A Shares
purchased in transactions of less than $1 million and when
certain special dealer arrangements are not in effect under
"Certain Investment Companies" set forth under "Reduced Sales
Charges," below.
When you purchase CDSC Class A Shares you will not pay a
sales charge at the time of purchase, and the Distributor will
pay to any dealer effecting such a purchase an amount equal to 1%
of the sales price of the shares purchased for purchases of $1
million but less than $2.5 million, 0.50 of 1% for purchases of
$2.5 million but less than $5 million, and 0.25 of 1% for
purchases of $5 million or more.
If you redeem all or part of your CDSC Class A Shares
during the four years after your purchase of such shares, at the
time of redemption you will be required to pay to the Distributor
a special contingent deferred sales charge based on the lesser of
(i) the net asset value of your redeemed CDSC Class A Shares at
the time of purchase or (ii) the net asset value of your redeemed
CDSC Class A Shares at the time of redemption (the "Redemption
Value"). The special charge will be an amount equal to 1% of the
Redemption Value if the redemption occurs within the first two
years after purchase, and 0.50 of 1% of the Redemption Value if
the redemption occurs within the third or fourth year after
purchase. The special charge will apply to redemptions of CDSC
Class A Shares purchased without a sales charge pursuant to a
Letter of Intent, as described below under "Reduced Sales Charges
for Certain Purchases of Class A Shares." The special charge does
not apply to Class A Shares acquired through the reinvestment of
dividends on CDSC Class A Shares or to any CDSC Class A Shares
held for more than four years after purchase. In determining
whether the special charge is applicable, it will be assumed that
the CDSC Class A Shares you have held the longest are the first
CDSC Class A Shares to be redeemed, unless you instruct the Agent
otherwise. It will also be assumed that if you have both CDSC
Class A Shares and non-CDSC Class A Shares the non-CDSC Class A
Shares will be redeemed first.
For purposes of determining the holding period for CDSC
Class A Shares, all of your purchases made during a calendar
month will be deemed to have been made on the first business day
of that month at the average cost of all purchases made during
that month. The four-year holding period will end on the first
business day of the 48th calendar month after the date your
purchase is deemed to have been made. Accordingly, the CDSC
holding period applicable to your CDSC Class A Shares may be up
to one month less than the full 48 months depending upon when
your actual purchase was made during a month. Running of the
48-month CDSC holding period will be suspended for one month for
each period of thirty days during which you have held shares of a
money market fund you have received in exchange for CDSC Class A
Shares under the Exchange Privilege. (See "Exchange Privilege.")
Reduced Sales Charges for Certain Purchases
of Class A Shares
Right of Accumulation: If you are a "single purchaser"
you may benefit from a reduction of the sales charge in
accordance with the above schedule for subsequent purchases of
Class A Shares if the cumulative value (at cost or current net
asset value, whichever is higher) of Class A Shares you have
previously purchased with a sales charge and still own, together
with Class A Shares of your subsequent purchase with such a
charge, amounts to $25,000 or more.
Letters of Intent: The foregoing schedule of reduced sales
charges will also be available to "single purchasers" who enter
into a written Letter of Intent (included in the Application)
providing for the purchase, within a thirteen-month period, of
Class A Shares of the Fund through a single selected dealer or
through the Distributor. Class A Shares of the Fund which you
previously purchased during a 90-day period prior to the date of
receipt by the Distributor of your Letter of Intent and which you
still own may also be included in determining the applicable
reduction. For further details, including escrow provisions, see
the Letter of Intent provisions of the Application.
General: Class A Shares may be purchased at the next
determined net asset value by the Fund's Trustees and officers,
by the directors, officers and certain employees, retired
employees and representatives of the Sub-Adviser and its parent
and affiliates, the Manager and the Distributor, by selected
dealers and brokers and their officers and employees, by certain
persons connected with firms providing legal, advertising or
public relations assistance, by certain family members of, and
plans for the benefit of, the foregoing, and for the benefit of
trust or similar clients of banking institutions over which these
institutions have full investment authority if the Fund or the
Distributor has entered into an agreement relating to such
purchases. Except for the last category, purchasers must give
written assurance that the purchase is for investment and that
the Class A Shares will not be resold except through redemption.
There may be tax consequences of these purchases. Such purchasers
should consult their own tax counsel. Class A Shares may also be
issued at net asset value in a merger, acquisition or exchange
offer made pursuant to a plan of reorganization to which the Fund
is a party.
The Fund permits the sale of its Class A Shares at prices
that reflect the reduction or elimination of the sales charge to
investors who are members of certain qualified groups meeting the
following requirements. A qualified group (i) is a group or
association, or a category of purchasers who are represented by a
fiduciary, professional or other representative (other than a
registered broker-dealer), which (ii) satisfies uniform criteria
which enable the Distributor to realize economies of scale in its
costs of distributing Class A Shares; (iii) gives its endorsement
or authorization (if it is a group or association) to an
investment program to facilitate solicitation of its membership
by a broker or dealer; and (iv) complies with the conditions of
purchase that are set forth in any agreement entered into between
the Fund and the group, representative or broker or dealer. At
the time of purchase you must furnish the Distributor with
information sufficient to permit verification that the purchase
qualifies for a reduced sales charge, either directly or through
a broker or dealer.
Certain Investment Companies: Class A Shares of the Fund may
be purchased at net asset value without sales charge (except as
set forth below under "Special Dealer Arrangements") to the
extent that the aggregate net asset value of such Class A Shares
does not exceed the proceeds from a redemption (a "Qualified
Redemption"), made within 120 days prior to such purchase, of
shares of another investment company on which a sales charge,
including a contingent deferred sales charge, has been paid.
Additional information is available from the Distributor.
To qualify, the following special procedures must be
followed:
1. A completed Application (included in the Prospectus)
and payment for the Class A Shares to be purchased must be
sent to the Distributor, Aquila Distributors, Inc., 380
Madison Avenue, Suite 2300, New York, NY 10017 and should
not be sent to the Fund's Shareholder Servicing Agent. (This
instruction replaces the mailing address contained on the
Application.)
2. The Application must be accompanied by evidence
satisfactory to the Distributor that the prospective
shareholder has made a Qualified Redemption in an amount at
least equal to the net asset value of the Class A Shares to
be purchased. Satisfactory evidence includes a confirmation
of the date and the amount of the redemption from the
investment company, its transfer agent or the investor's
broker or dealer, or a copy of the investor's account
statement with the investment company reflecting the
redemption transaction.
3. You must complete and return to the Distributor a
Transfer Request Form, which is available from the
Distributor.
The Fund reserves the right to alter or terminate this
privilege at any time without notice. The Prospectus will be
supplemented to reflect such alteration or termination.
Special Dealer Arrangements: During certain periods
determined by the Distributor, the Distributor (not the Fund)
will pay to any dealer effecting a purchase of Class A Shares of
the Fund using the proceeds of a Qualified Redemption the lesser
of (i) 1% of such proceeds or (ii) the same amounts described
under "Purchase of $1 Million or More," above, on the same terms
and conditions. Class A Shares of the Fund issued in such a
transaction will be CDSC Class A Shares and if you thereafter
redeem all or part of such shares during the four-year period
from the date of purchase you will be subject to the special
contingent deferred sales charge described under "Purchase of $1
Million or More," above, on the same terms and conditions.
Whenever the Special Dealer Arrangements are in effect the
Prospectus will be supplemented.
How to Purchase Class C Shares
(Level-Payment Class Shares)
Level-Payment Class Shares (Class C Shares) are offered
at net asset value with no sales charge payable at purchase. A
level charge is imposed for service and distribution fees for the
first six years after the date of purchase at the aggregate
annual rate of 1% of the average annual net assets of the Fund
represented by the Class C Shares. If you redeem Class C Shares
before you have held them for 12 months from the date of purchase
you will pay a contingent deferred sales charge ("CDSC"). The
CDSC is charged at the rate of 1%, calculated on the net asset
value of the redeemed Class C Shares at the time of purchase or
at redemption, whichever is less. There is no CDSC after Class C
Shares have been held beyond the applicable period. The CDSC does
not apply to Class C Shares acquired through the reinvestment of
dividends on Class C Shares.
The Distributor will pay to any dealer effecting a purchase
of Class C Shares an amount equal to 1% of the sales price of the
Class C Shares purchased.
Additional Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
any class of shares of the Fund. Additional compensation may
include payment or partial payment for advertising of the Fund's
shares, payment of travel expenses, including lodging, incurred
in connection with attendance at sales seminars taken by
qualifying registered representatives to locations within or
outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences. In some instances, such compensation may be made
available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. The cost to the
Distributor of such promotional activities and such payments to
participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund
effected through such participating dealers, whether retained by
the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Manager out of its own funds, directly or through
the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Systematic Payroll Investments
If your employer has established with the Fund a
Systematic Payroll Investment Plan ("Payroll Plan") you may
arrange for systematic investments into the Fund through the
Payroll Plan. Investments can be made in either Class A Shares or
Class C Shares. In order to participate in a Payroll Plan, you
should make arrangements with your own employer's payroll
department, and you must complete and sign any special
application forms which may be required by your employer. You
must also complete the Application included in the Prospectus.
Once your application is received and put into effect, under a
Payroll Plan the employer will make a deduction from payroll
checks in an amount you determine, and will remit the proceeds to
the Fund. An investment in the Fund will be made for you at the
offering price, which includes applicable sales charges
determined as described above, when the Fund receives the funds
from your employer. The Fund will send a confirmation of each
transaction to you. To change the amount of or to terminate your
participation in the Payroll Plan (which could take up to ten
days), you must notify your employer.
Confirmations and Share Certificates
All purchases of shares will be confirmed and credited to
you in an account maintained for you at the Agent in full and
fractional shares of the Fund (rounded to the nearest 1/1000th of
a share).
No share certificates will be issued for Class C Shares.
Share certificates for Class A Shares will be issued only if you
so request in writing to the Agent. All share certificates
previously issued by the Fund represent Class A Shares. No
certificates will be issued for fractional Class A Shares or if
you have elected Automatic Investment or Telephone Investment for
Class A Shares (see "How to Invest in the Fund" above) or
Expedited Redemption (see "How to Redeem Your Investment" below).
If certificates for Class A Shares are issued at your request,
Expedited Redemption Methods described below will not be
available. In addition, you may incur delay and expense if you
lose the certificates.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan")
under Rule 12b-1 (the "Rule") under the 1940 Act. The Rule
provides in substance that an investment company may not engage
directly or indirectly in financing any activity which is
primarily intended to result in the sale of its shares except
pursuant to a written plan adopted under the Rule. The Plan has
four parts.
Under one part of the Plan, the Fund is authorized to make
payments with respect to Class A Shares ("Class A Permitted
Payments") to Qualified Recipients, which payments shall be made
through the Distributor or shareholder servicing agent as
disbursing agent and may not exceed, for any fiscal year of the
Fund (as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any fiscal
year which is not a full fiscal year), 0.15 of 1% of the average
annual net assets represented by the Class A Shares of the Fund.
Such payments shall be made only out of the Fund's assets
allocable to the Class A Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of
the Fund's Class A Shares or servicing of accounts of
shareholders owning Class A Shares.
During the fiscal year ended December 31, 1997, $333,695
was paid to Qualified Recipients with respect to Class A Shares,
of which $6,454 was retained by the Distributor. All of such
payments were for compensation. (See the Additional Statement for
a description of the Distribution Plan.)
Whenever the Fund makes Permitted Payments, the aggregate
annual rate of the advisory fee and administration fee otherwise
payable by the Fund will be reduced from 0.50 of 1% to 0.40 of 1%
of the Fund's average annual net assets. (See "Management
Arrangements.")
Under another part of the Plan, the Fund is authorized to
make payments with respect to Class C Shares ("Class C Permitted
Payments") to Qualified Recipients. Class C Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Plan are not accruable or
for any fiscal year which is not a full fiscal year), 0.75 of 1%
of the average annual net assets represented by the Class C
Shares of the Fund. Such payments shall be made only out of the
Fund's assets allocable to the Class C Shares. "Qualified
Recipients" means broker-dealers or others selected by the
Distributor, including but not limited to any principal
underwriter of the Fund, with which the Fund or the Distributor
has entered into written agreements and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Class C Shares or
servicing of accounts of shareholders owning Class C Shares.
Payments with respect to Class C Shares during the first year
after purchase are paid to the Distributor and thereafter to
other Qualified Recipients.
During the Fund's fiscal year ended December 31, 1997,
$4,961 was paid to Qualified Recipients under the Plan with
respect to the Fund's Class C Shares of which $4,961 was retained
by the Distributor. All of such payments were for compensation.
Payments with respect to Class C Shares during the first year
after purchase are paid to the Distributor and thereafter to
other Qualified Recipients.
A third part of the Plan authorizes payments ("Permitted
Payments") with respect to the Fund's Class I Shares. (See
"General Information.")
Another part of the Plan is designed to protect against
any claim against or involving the Fund that some of the expenses
which might be considered to be sales-related which the Fund pays
or may pay come within the purview of the Rule. The Fund believes
that except for Permitted Payments it is not financing any such
activity and does not consider any payment enumerated in this
part of the Plan as so financing any such activity. However, it
might be claimed that some of the expenses the Fund pays come
within the purview of the Rule. If and to the extent that any
payment as specifically listed in the Plan (see the Additional
Statement) is considered to be primarily intended to result in or
as indirect financing of any activity which is primarily intended
to result in the sale of Fund shares, these payments are
authorized under the Plan. In addition, if the Manager, out of
its own funds, makes payment for distribution expenses such
payments are authorized. (See the Additional Statement.)
Shareholder Services Plan for Class C Shares
Under a Shareholder Services Plan, the Fund is authorized
to make payments with respect to Class C Shares ("Service Fees")
to Qualified Recipients. Service Fees shall be paid through the
Distributor or shareholder servicing agent as disbursing agent,
and may not exceed, for any fiscal year of the Fund (as adjusted
for any part or parts of a fiscal year during which payments
under the Plan are not accruable or for any fiscal year which is
not a full fiscal year), 0.25 of 1% of the average annual net
assets represented by the Class C Shares of the Fund. Such
payments shall be made only out of the Fund's assets represented
by the Class C Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have agreed to provide personal services to
holders of Class C Shares and/or maintenance of Class C Shares
shareholder accounts. (See the Additional Statement.) Service
Fees with respect to Class C Shares will be paid to the
Distributor. During the fiscal year ended December 31, 1997,
payments of $1,653 were made for Service Fees with respect to
Class C Shares, all of which was retained by the Distributor.
HOW TO REDEEM YOUR INVESTMENT
You may redeem all or any part of your shares at the net
asset value next determined after acceptance of your redemption
request at the Agent (subject to any applicable contingent
deferred sales charge for redemptions of Class C Shares and CDSC
Class A Shares). For redemptions of Class C Shares and CDSC Class
A Shares, at the time of redemption a sufficient number of
additional shares will be redeemed to pay for any applicable
contingent deferred sales charge. Redemptions can be made by the
various methods described below. There is no minimum period for
any investment in the Fund, except for shares recently purchased
by check, Automatic Investment or Telephone Investment as
discussed below. Except for CDSC Class A Shares (see "Purchase of
$1 Million or More") there are no redemption fees or withdrawal
penalties for Class A Shares. Class C Shares are subject to a
contingent deferred sales charge if redeemed before they have
been held 12 months from the date of purchase. (See "Alternative
Purchase Plans.") A redemption may result in a transaction
taxable to you. If you own both Class A Shares and Class C Shares
and do not specify which you wish to redeem, it will be assumed
that you wish to redeem Class A Shares.
For your convenience the Fund offers expedited redemption
for all classes of shares to provide you with a high level of
liquidity for your investment.
Expedited Redemption Methods
(Non-Certificate Shares)
You have the flexibility of two expedited methods of
initiating redemptions. They are available as to shares of any
class not represented by certificates.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments
a) to a Financial Institution account you have predesignated
or
b) by check in the amount of $50,000 or less, mailed to you,
if your shares are registered in your name at the Fund and
the check is sent to your address of record, provided that
there has not been a change of your address of record during
the 30 days preceding your redemption request. You can make
only one request for telephone redemption by check in any
7-day period.
See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-872-5860 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
2. By FAX or Mail. You may also request redemption
payments to a predesignated Financial Institution account by
a letter of instruction sent to the Fund's Shareholder
Servicing Agent: PFPC Inc., by FAX at 302-791-1777 or by
mail to 400 Bellevue Parkway, Wilmington, DE 19809
indicating name(s), account number, amount to be redeemed,
and any payment directions, signed by the registered
holder(s). Signature guarantees are not required. See
"Redemption Payments" below for payment methods.
If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access
Features form and provide the required information concerning
your Financial Institution account number. The Financial
Institution account must be in the exclusive name(s) of the
shareholder(s) as registered with the Fund. You may change the
designated Financial Institution account at any time by
completing and returning a Ready Access Features form. For
protection of your assets, this form requires signature
guarantees and possible additional documentation.
Regular Redemption Method
(Certificate and Non-Certificate Shares)
1. Certificate Shares. Certificates representing Class A
Shares to be redeemed should be sent in blank (unsigned) to
the Fund's Shareholder Servicing Agent: PFPC Inc., 400
Bellevue Parkway, Wilmington, DE 19809 with payment
instructions. A stock assignment form signed by the
registered shareholder(s) exactly as the account is
registered must also be sent to the Shareholder Servicing
Agent.
For your own protection, it is essential that certificates
be mailed separately from signed redemption documentation.
Because of possible mail problems, it is also recommended that
certificates be sent by registered mail, return receipt
requested.
For a redemption request to be in "proper form," the
signature or signatures must be the same as in the registration
of the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required
if sufficient documentation is not on file with the Agent.
Additional documentation may be required where shares are held by
certain types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by other
than the shareholder of record. If redemption proceeds of $50,000
or less are payable to the record holder and are to be sent to
the record address, no signature guarantee is required, except as
noted above. In all other cases, signatures must be guaranteed by
a member of a national securities exchange, a U.S. bank or trust
company, a state-chartered savings bank, a federally chartered
savings and loan association, a foreign bank having a U.S.
correspondent bank, a participant in the Securities Transfer
Association Medallion Program (STAMP), the Stock Exchanges
Medallion Program (SEMP) or the New York Stock Exchange, Inc.
Medallion Signature Program (MSP). A notary public is not an
acceptable signature guarantor.
2. Non-Certificate Shares. If you own non-certificate
shares registered on the books of the Fund, and you have not
elected Expedited Redemption to a predesignated Financial
Institution account, you must use the Regular Redemption
Method. Under this redemption method you should send a
letter of instruction to: the Fund's Shareholder Servicing
Agent: PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809
containing:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed or a
statement that all shares held in the account are to be
redeemed;
Payment instructions (normally redemption proceeds will
be mailed to your address as registered with the Fund);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated
above.
Redemption Payments
Redemption payments will ordinarily be mailed to you at
your address of record. If you so request and the amount of your
redemption proceeds is $1,000 or more, the proceeds will,
wherever possible, be wired or transferred through the facilities
of the Automated Clearing House to the Financial Institution
account specified in the Expedited Redemption section of your
Application or Ready Access Features form. The Fund may impose a
charge, not exceeding $5.00 per wire redemption, after written
notice to shareholders who have elected this redemption
procedure. The Fund has no present intention of making this
charge. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate the use of the Automated Clearing House
to make redemption payments at any time or charge a service fee,
although no such fee is presently contemplated. If any such
changes are made, the Prospectus will be supplemented to reflect
them. If you use a broker or dealer to arrange for a redemption,
you may be charged a fee for this service.
The Fund will normally make payment for all shares
redeemed on the next business day (see "Net Asset Value Per
Share") following acceptance of the redemption request made in
compliance with one of the redemption methods specified above.
Except as set forth below, in no event will payment be made more
than seven days after acceptance of such a redemption request.
However, the right of redemption may be suspended or the date of
payment postponed (i) during periods when the New York Stock
Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the
Securities and Exchange Commission by rule or regulation; (ii)
during periods in which an emergency, as determined by the
Securities and Exchange Commission, exists which causes disposal
of, or determination of the net asset value of, the portfolio
securities to be unreasonable or impracticable; or (iii) for such
other periods as the Securities and Exchange Commission may
permit. Payment for redemption of shares recently purchased by
check (irrespective of whether the check is a regular check or a
certified, cashier's or official bank check) or by Automatic
Investment or Telephone Investment may be delayed up to 15 days
or until (i) the purchase check or Automatic Investment or
Telephone Investment has been honored or (ii) the Agent has
received assurances by telephone or in writing from the Financial
Institution on which the purchase check was drawn, or from which
the funds for Automatic Investment or Telephone Investment were
transferred, satisfactory to the Agent and the Fund, that the
purchase check or Automatic Investment or Telephone Investment
will be honored. Possible delays in payment of redemption
proceeds can be eliminated by using wire payments or Federal
Reserve drafts to pay for purchases.
If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by the distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. (See the Additional Statement for details.)
The Fund has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions
or failure to meet the minimum investment level under an
Automatic Purchase Program. If the Board elects to do this,
shareholders who are affected will receive prior written notice
and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.
Reinvestment Privilege
You may reinvest without payment of any additional sales
charge all or part of any redemption proceeds within 120 days of
a redemption of shares in shares of the Fund of the same class as
the shares redeemed at the net asset value next determined after
the Agent receives your reinvestment order. In the case of Class
C Shares or CDSC Class A Shares on which a contingent deferred
sales charge was deducted at the time of redemption, the
Distributor will refund to you the amount of such sales charge,
which will be added to the amount of the reinvestment. The Class
C Shares or CDSC Class A Shares issued on reinvestment will be
deemed to have been outstanding from the date of your original
purchase of the redeemed shares, less the period from redemption
to reinvestment. The reinvestment privilege for any class may be
exercised only once a year, unless otherwise approved by the
Distributor. If you have realized a gain on the redemption of
your shares, the redemption transaction is taxable, and
reinvestment will not alter any capital gains tax payable. If
there has been a loss on the redemption, some or all of the loss
may be tax deductible, depending on the amount reinvested and the
length of time between the redemption and the reinvestment. You
should consult your own tax advisor on this matter.
AUTOMATIC WITHDRAWAL PLAN
You may establish an Automatic Withdrawal Plan if you own or
purchase Class A Shares of the Fund having a net asset value of
at least $5,000. The Automatic Withdrawal Plan is not available
for Class C Shares.
Under an Automatic Withdrawal Plan you will receive a
monthly or quarterly check in a stated amount, not less than $50.
If such a plan is established, all dividends and distributions
must be reinvested in your shareholder account. Redemption of
Class A Shares to make payments under the Automatic Withdrawal
Plan will give rise to a gain or loss for tax purposes. (See the
Automatic Withdrawal Plan provisions of the Application included
in the Prospectus, the Additional Statement under "Automatic
Withdrawal Plan," and "Dividend and Tax Information" below.)
Purchases of additional Class A Shares concurrently with
withdrawals are undesirable because of sales charges when
purchases are made. Accordingly, you may not maintain an
Automatic Withdrawal Plan while simultaneously making regular
purchases. While an occasional lump sum investment may be made,
such investment should normally be an amount at least equal to
three times the annual withdrawal or $5,000, whichever is less.
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.
Change in Management Arrangements
On April 24, 1998, the management arrangements described
below were approved by the Fund's shareholders and will go into
effect on the earlier of May 1, 1998 or, if not approved by the
shareholders on that date, on the date of such approval
thereafter. The new arrangements are designed to change the form
of the Fund's investment advisory and administration arrangements
to a new structure involving an adviser and a sub-adviser. The
new arrangements do not result in any change in overall
management fees paid by the Fund, nor any change in the parties
providing these services. Marketing efforts and positioning of
the Fund will remain the same with a strong local niche
orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which since inception of the Fund has served as the
Fund's administrator, in addition becomes investment adviser
under a new agreement (the "Advisory and Administration
Agreement") under which it also continues to provide the Fund
with all administrative services. Also, by adoption of a
Sub-Advisory Agreement between Aquila and Banc One Investment
Advisors Corporation ("the Sub-Adviser"), the former investment
advisory agreement is replaced by one under which Aquila appoints
the Sub-Adviser as Sub-Adviser to the Fund. Under the
Sub-Advisory Agreement, the Sub-Adviser will continue to provide
the Fund with advisory services of the kind which it formerly
provided as adviser. The duties of the administrator, previously
performed under an administration agreement, are now performed by
Aquila under the Advisory and Administration Agreement where
Aquila is referred to as the "Manager." The former administration
agreement terminates upon effectiveness of the new
agreements.
The Advisory and Administration Agreement
The Advisory and Administration Agreement between the
Fund and Aquila Management Corporation (the "Manager") has
several parts, most of which are substantially identical to
corresponding provisions in the Fund's former advisory agreements
and administration agreement. The Advisory and Administration
Agreement contains provisions relating to investment advice for
the Fund and management of its portfolio that are substantially
identical to prior advisory agreements, except that the Manager
has the power to delegate its advisory functions to a
sub-adviser, which it will employ at its own expense. It has
delegated these duties to the Sub-Adviser. The Advisory and
Administration Agreement contains provisions relating to
administrative services that are substantially identical to those
contained in the Fund's former administration agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold
by the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory and Administration Agreement provides that,
subject to the termination provisions described below, the
Manager may at its own expense delegate to a qualified
organization ("Sub-Adviser"), affiliated or not affiliated with
the Manager, any or all of the above duties. Any such delegation
of the duties set forth in (i), (ii) or (iii) above shall be by a
written agreement (the "Sub-Advisory Agreement") approved as
provided in Section 15 of the Investment Company Act of 1940. The
Manager delegates all of such functions to the Sub-Adviser in the
Sub-Advisory Agreement, which becomes effective at the same time
as the Advisory and Administration Agreement.
The Advisory and Administration Agreement also provides
that subject to the direction and control of the Board of
Trustees of the Fund, the Manager shall provide all
administrative services to the Fund other than those relating to
its investment portfolio which have been delegated to a
Sub-Adviser of the Fund under the Sub-Advisory Agreement; as part
of such administrative duties, the Manager shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the
supervision and coordination of the performance of such
agreements, and the overseeing of all administrative matters
which are necessary or desirable for the effective operation
of the Fund and for the sale, servicing or redemption of the
Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that if there is a Sub-Adviser,
daily pricing of the Fund's portfolio shall be the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement) or, at its expense and responsibility, delegate
such duties in whole or in part to a company satisfactory to
the Fund;
(iv) maintain the Fund's books and records, and prepare
(or assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's
shareholders and Trustees, reports to and other filings with
the Securities and Exchange Commission and any other
governmental agencies, and tax returns, and oversee the
insurance relationships of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be necessary
to register or maintain the registration of the Fund and/or
its shares under the securities or "Blue-Sky" laws of all
such jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any
such inquiry or communication is more properly to be
responded to by the Fund's shareholder servicing and
transfer agent or distributor, oversee such shareholder
servicing and transfer agent's or distributor's response
thereto.
The Advisory and Administration Agreement contains
provisions relating to compliance of the investment program,
responsibility of the Manager for any investment program managed
by it, allocation of brokerage, and responsibility for errors
that are substantially the same as the corresponding provisions
in the Sub-Advisory Agreement. (See the Additional
Statement.)
The Advisory and Administration Agreement provides that
the Manager shall, at its own expense, pay all compensation of
Trustees, officers, and employees of the Fund who are affiliated
persons of the Manager.
The Fund bears the costs of preparing and setting in type
its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under the agreement or otherwise
by the Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Fund, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Manager or such
sub-adviser, administrator or principal underwriter; (v) legal
and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on the
payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Fund; (x) all other expenses
incidental to holding meetings of the Fund's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which
the Fund may have to indemnify its officers and Trustees.
Under the Advisory and Administration Agreement, the Fund
will pay to the Manager a fee payable monthly and computed on the
net asset value of the Fund as of the close of business each
business day at the annual rate of 0.50 of 1% of such net asset
value, provided, however, that for any day that the Fund pays or
accrues a fee under the Distribution Plan of the Fund based upon
the assets of the Fund, the annual management fee shall be
payable at the annual rate of 0.40 of 1% of such net asset
value.
The Advisory and Administration Agreement provides that
it may be terminated by the Manager at any time without penalty
upon giving the Fund sixty days' written notice (which notice may
be waived by the Fund) and may be terminated by the Fund at any
time without penalty upon giving the Manager sixty days' written
notice (which notice may be waived by the Manager), provided that
such termination by the Fund shall be directed or approved by a
vote of a majority of its Trustees in office at the time or by a
vote of the holders of a majority (as defined in the 1940 Act) of
the voting securities of the Fund outstanding and entitled to
vote. The specific portions of the Advisory and Administration
Agreement which relate to providing investment advisory services
will automatically terminate in the event of the assignment (as
defined in the 1940 Act) of the Advisory and Administration
Agreement, but all other provisions relating to providing
services other than investment advisory services will not
terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Fund as of the close of business each business day shall be
reduced to the annual rate of 0.26 of 1% of such net asset
value.
The Sub-Advisory Agreement
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the Sub-Adviser,
which provides, subject to the control of the Board of Trustees,
for investment supervision and at the Sub-Adviser's expense for
pricing of the Fund's portfolio daily using a pricing service or
other source of pricing information satisfactory to the Fund and,
unless otherwise directed by the Board of Trustees, for pricing
of the Fund's portfolio at least quarterly using another such
source satisfactory to the Fund. The Sub-Advisory Agreement
states that the Sub-Adviser shall, at its expense, provide to the
Fund all office space and facilities, equipment and clerical
personnel necessary for the carrying out of the Sub-Adviser's
duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that the Manager
agrees to pay the Sub-Adviser, and the Sub-Adviser agrees to
accept as full compensation for all services rendered by the
Sub-Adviser as such, a management fee payable monthly and
computed on the net asset value of the Fund as of the close of
business each business day at the annual rate of 0.17 of 1% of
such net asset value, provided, however, that for any day that
the Fund pays or accrues a fee under the Distribution Plan of the
Fund based upon the assets of the Fund (other than a fee
allocable by class to certain shares of the Fund) the annual
management fee shall be payable at the annual rate of 0.14 of 1%
of such net asset value.
The Sub-Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund;(see the
Additional Statement). Under these provisions, the Sub-Adviser is
authorized to consider sales of shares of the Fund or of any
other investment company or companies having the same investment
adviser, sub-adviser, administrator or principal underwriter as
the Fund. It has termination and renewal provisions similar to
those contained in the Advisory and Administration Agreement.
(See the Additional Statement.)
Information about the Manager, the Sub-Adviser and the
Distributor
Banc One Investment Advisors Corporation (the
"Sub-Adviser") is a wholly-owned subsidiary of BANC ONE
CORPORATION ("Banc One"). Banc One currently has affiliate
banking organizations in Kentucky, Arizona, Colorado, Illinois,
Indiana, Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia
and Wisconsin. On a consolidated basis, Banc One had assets of
approximately $115.9 billion as of December 31, 1997. As of July
1, 1997 the Sub-Adviser was responsible for management of over
$15 billion in municipal obligations, of which, $3.0 billion were
held in mutual funds and of which $343.1 million were obligations
of Kentucky issuers. The Sub-Adviser services Kentucky clients at
offices in Louisville and Lexington. As it has been in the past,
since the beginning of the Fund's operations in 1987, the Fund's
investments will continue to be managed so that it will have a
portfolio of quality-oriented (investment grade) securities.
The Fund's portfolio is managed locally in Kentucky by
Mr. Thomas S. Albright, Vice President and Senior Portfolio
Manager, at the Sub-Adviser's Louisville office. He has served in
this capacity since September, 1995, when the Sub-Adviser became
adviser to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank, the Sub-Adviser's local predecessor, where he was
responsible for management of its investment portfolio. He also
served as President of Liberty Investment Services, Inc., that
bank's full service brokerage subsidiary. Mr. Albright is a
member of the Sub-Adviser's Fixed Income Fund Sub-Committee. Mr.
Albright attended the University of Louisville.
See the Additional Statement as to the legality, under
the Glass-Steagall Act, of the Sub-Adviser's acting as the Fund's
investment adviser. In general, under that Act, the Sub-Adviser
will not, among other things, be involved in the promotion or
distribution of shares of the Fund.
The Fund's Manager is founder and Manager and/or
administrator to the Aquilasm Group of Funds, which consists of
tax-free municipal bond funds, money market funds and two equity
funds. As of December 31, 1997, these funds had aggregate assets
of approximately $2.8 billion, of which approximately $1.9
billion consisted of assets of the tax-free municipal bond funds.
The Manager, which was founded in 1984, is controlled by Mr. Lacy
B. Herrmann (directly, through a trust and through share
ownership by his wife). (See the Additional Statement for
information on Mr. Herrmann.)
The Distributor currently handles the distribution of the
shares of fourteen funds (five money market funds, seven tax-free
municipal bond funds and two equity funds), including the Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs
relating to prospectuses and reports as well as the costs of
supplemental sales literature, advertising and other promotional
activities.
At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which
are currently owned 75% by Mr. Herrmann and 25% by Diana P.
Herrmann, will be owned by certain directors and/or officers of
the Manager and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
During the fiscal year ended December 31, 1997, the Fund
paid or accrued $322,582 and $599,081 to the Sub-Adviser and the
Manager, respectively, under the former advisory and
administration agreements then in effect.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Fund will declare all of its net income, as defined
below, as dividends on every day, including weekends and
holidays, on those shares outstanding for which payment was
received by the close of business on the preceding business day.
Net income for dividend purposes includes all interest income
accrued by the Fund since the previous dividend declaration,
including accretion of any original issue discount, less expenses
paid or accrued. As such net income will vary, the Fund's
dividends will also vary.The per share dividends of Class C
Shares will be lower than the per share dividends on the Class A
Shares as a result of the higher service and distribution fees
applicable to those shares. In addition, the dividends of each
class can vary because each class will bear certain
class-specific charges. Dividends and other distributions paid by
the Fund with respect to each class of its shares are calculated
at the same time and in the same manner.
It is the Fund's present policy to pay dividends so that
they will be received or credited by approximately the first day
of each month. On the Application or by completing a Ready Access
Form, you may elect to have dividends deposited without charge by
electronic funds transfers into your account at a Financial
Institution which is a member of the Automated Clearing
House.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid
by the Agent to a selected dealer; or (ii) the third day on which
the New York Stock Exchange is open after the day on which the
net asset value of the redeemed shares has been determined. (See
"How To Redeem Your Investment.")
Net investment income includes amounts of income from the
Kentucky Obligations in the Fund's portfolio which are allocated
as "exempt-interest dividends." "Exempt-interest dividends" are
exempt from regular Federal income tax. The allocation of
"exempt-interest dividends" will be made by the use of one
designated percentage applied uniformly to all income dividends
declared during the Fund's tax year. Such designation will
normally be made in the first month after the end of each of the
Fund's fiscal years as to income dividends paid in the prior
year. It is possible that in certain circumstances, a small
portion of the dividends paid by the Fund will be subject to
income taxes. During the Fund's fiscal year ended December 31,
1997, 97.2% of the Fund's dividends were "exempt-interest
dividends." For the calendar year 1997, 2.8% of the total
dividends paid were taxable. The percentage of income designated
as tax-exempt for any particular dividend may be different from
the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be
paid out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of redemptions
to shareholders, and from short- and long-term gains
distributions (if any) and any other distributions that do not
qualify as "exempt-interest dividends," if shareholders do not
comply with provisions of the law relating to the furnishing of
taxpayer identification numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the
Agent or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be
automatically reinvested in full and fractional shares of the
Fund at net asset value on the record date for the dividend or
distribution or other date fixed by the Board of Trustees. An
election to receive cash will continue in effect until written
notification of a change is received by the Agent. All
shareholders, whether their dividends are received in cash or are
being reinvested, will receive a monthly account summary
indicating the current status of their investment. There is no
fixed dividend rate. Corporate shareholders of the Fund are not
entitled to any deduction for dividends received from the Fund.
Tax Information
The Fund qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as
dividends and distributions. However, the Code contains a number
of complex tests relating to such qualification and it is
possible although not likely that the Fund might not meet one or
more of these tests in any particular year. If it does not so
qualify, it would be treated for tax purposes as an ordinary
corporation, would receive no tax deduction for payments made to
shareholders and would be unable to pay dividends or
distributions which would qualify as "exempt-interest dividends"
or "capital gains dividends," as discussed below.
The Fund intends to qualify during each fiscal year under
the Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income
earned by the Fund on Kentucky Obligations will be excludable
from gross income of the shareholders for regular Federal income
tax purposes. Capital gains dividends are not included in
exempt-interest dividends. Although "exempt-interest dividends"
are not taxed, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the
Fund) received or acquired during the year.
The Code requires that either gains realized by the Fund
on the sale of municipal obligations acquired after April 30,
1993 at a price which is less than face or redemption value be
included as ordinary income to the extent such gains do not
exceed such discount or that the discount be amortized and
included ratably in taxable income. There is an exception to the
foregoing treatment if the amount of the discount is less than
0.25% of face or redemption value multiplied by the number of
years from acquisition to maturity. The Fund will report such
ordinary income in the years of sale or redemption rather than
amortize the discount and report it ratably. To the extent the
resultant ordinary taxable income is distributed to shareholders,
it will be taxable to them as ordinary income.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates)
are reportable by shareholders as gain from the sale or exchange
of a capital asset held for more than one year. This is the case
whether the shareholder takes the distribution in cash or elects
to have the distribution reinvested in Fund shares and regardless
of the length of time the shareholder has held his or her
shares.
Short-term gains, when distributed, are taxed to
shareholders as ordinary income. Capital losses of the Fund are
not distributed but carried forward by the Fund to offset gains
in later years and thereby lessen the later-year capital gains
dividends and amounts taxed to shareholders.
The Fund's gains or losses on sales of Kentucky Obligations
will be long-term or short-term depending upon the length of time
the Fund has held such obligations. Capital gains and losses of
the Fund will also include gains and losses on Futures and
options, if any, including gains and losses actually realized on
sales and exchanges and gains and losses deemed to be realized.
Those deemed to be realized are on Futures and options held by
the Fund at year-end, which are "marked to the market," that is,
deemed sold for fair market value. Net gains or losses realized
and deemed realized on Futures and options will be reportable by
the Fund as long-term to the extent of 60% of the gains or losses
and short-term to the extent of 40% regardless of the actual
holding period of such investments.
Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders
to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under
rules used by the Internal Revenue Service for determining when
borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund
may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the
purchase of shares. The receipt of exempt-interest dividends from
the Fund by an individual shareholder may result in some portion
of any social security payments or railroad retirement benefits
received by the shareholder or the shareholder's spouse being
included in taxable income.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
or private activity bonds should consult their own tax advisers
before purchasing shares.
While interest from all Kentucky Obligations is tax-exempt
for purposes of computing the shareholder's regular tax, interest
from so-called private activity bonds issued after August 7,
1986, constitutes a tax preference for both individuals and
corporations and thus will enter into a computation of the
alternative minimum tax. Whether or not that computation will
result in a tax will depend on the entire content of the
taxpayer's return. The Fund will not invest in the types of
Kentucky Obligations which would give rise to interest that would
be subject to alternative minimum taxation if more than 20% of
its net assets would be so invested, and may refrain from
investing in that type of bond completely. The 20% limit is a
fundamental policy of the Fund.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current
earnings, this adjustment will tend to make it more likely that
corporate shareholders will be subject to the alternative minimum
tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid
for the shares. If you are required to pay a contingent deferred
sales charge at the time of redemption, the amount of that charge
will reduce the amount of your gain or increase the amount of
your loss as the case may be. Your gain or loss will be long-term
if you held the redeemed shares for over 18 months, mid-term if
you held the redeemed shares for over one year but not more than
18 months and short-term, if for a year or less. Long term
capital gains are currently taxed at a maximum rate of 20%,
mid-term capital gains are currently taxed at a maximum rate of
28%, and short-term gains are currently taxed at ordinary income
tax rates. However, if shares held for six months or less are
redeemed and you have a loss, two special rules apply: the loss
is reduced by the amount of exempt-interest dividends, if any,
which you received on the redeemed shares, and any loss over and
above the amount of such exempt-interest dividends is treated as
a long-term loss to the extent you have received capital gains
dividends on the redeemed shares.
Tax Effect of Conversion
Class C Shares will automatically convert to Class A Shares
approximately six years after purchase. No gain or loss will be
recognized by the Fund or its shareholders upon such conversions;
each shareholder's adjusted tax basis in the Class A Shares
received upon conversion will equal the shareholder's adjusted
tax basis in the Class C Shares held immediately before the
conversion; and each shareholder's holding period for the Class A
Shares received upon conversion will include the period for which
the shareholder held as capital assets the converted Class C
Shares immediately before conversion.
Kentucky Tax Information
Since the Fund may, except as indicated below, purchase only
Kentucky Obligations (which, as defined, means obligations,
including those of non-Kentucky issuers, of any maturity which
pay interest which, in the opinion of counsel, is exempt from
regular Federal income taxes and Kentucky income taxes) all of
the exempt-interest dividends paid by the Fund will be excludable
from the shareholder's gross income for Kentucky income tax
purposes. The Fund may also pay "short-term gains distributions"
and "long-term gains distributions," each as discussed under
"Dividends and Distributions" above. Under Kentucky income tax
law, short-term gains distributions are not exempt from Kentucky
income tax. Kentucky taxes long-term gains distributions at its
ordinary individual and corporate rates. The only investment
which the Fund may make other than in Kentucky Obligations is in
Futures and options on them. Any gains on Futures and options
(including gains imputed under the Code) paid as part or all of a
short-term gains distribution or a long-term gains distribution
will be taxed as indicated above. Under the laws of Kentucky
relating to ad valorem taxation of property, the shareholders
rather than the Fund are considered the owners of the Fund's
assets. Each shareholder will be deemed to be the owner of a
pro-rata portion of the Fund. According to the Kentucky Revenue
Cabinet, to the extent that such portion consists of Kentucky
Obligations, it will be exempt from property taxes, but it will
be subject to property taxes on intangibles to the extent it
consists of cash on hand,Futures, options and other nonexempt
assets.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among
this Fund, certain tax-free municipal bond funds and equity funds
(together with this Fund, the "Bond or Equity Funds") and certain
money market funds (the "Money-Market Funds"), all of which are
sponsored by Aquila Management Corporation and Aquila
Distributors, Inc., and have the same Manager or Administrator
and Distributor as the Fund. All exchanges are subject to certain
conditions described below. As of the date of the Prospectus, the
Aquila-sponsored Bond or Equity Funds are this Fund, Aquila Rocky
Mountain Equity Fund, Aquila Cascadia Equity Fund, Hawaiian
Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of
Oregon, Tax-Free Fund of Colorado, Tax-Free Fund For Utah and
Narragansett Insured Tax-Free Income Fund; the Aquila
Money-Market Funds are Capital Cash Management Trust, Pacific
Capital Cash Assets Trust (Original Shares), Pacific Capital
Tax-Free Cash Assets Trust (Original Shares), Pacific Capital
U.S. Government Securities Cash Assets Trust (Original Shares)
and Churchill Cash Reserves Trust.
Generally, you can exchange shares of a given class of a
Bond or Equity Fund including the Fund for shares of the same
class of any other Bond or Equity Fund, or for shares of any
Money Market Fund, without the payment of a sales charge or any
other fee, and there is no limit on the number of exchanges you
can make from fund to fund. However, the following important
information should be noted:
(1) CDSCs upon redemptions of shares acquired through
exchanges. If you exchange shares subject to a CDSC, no CDSC will
be imposed at the time of exchange, but the shares you receive in
exchange for them will be subject to the applicable CDSC if you
redeem them before the requisite holding period (extended, if
required) has expired.
If the shares you redeem would have incurred a CDSC if
you had not made any exchanges, then the same CDSC will be
imposed upon the redemption regardless the exchanges that have
taken place since the original purchase.
(2) Extension of Holding Periods by owning Money-Market
Funds Any period of 30 days or more during which Money-Market
shares received on an exchange of CDSC Class A Shares or Class C
Shares are held is not counted in computing the applicable
holding period for CDSC Class A Shares or Class C Shares.
(3) Originally purchased Money Market Fund shares.
Shares of a Money Market Fund (and any shares acquired as a
result of reinvestment of dividends and/or distributions on these
shares) acquired directly in a purchase (or in exchange for Money
Market Fund Shares that were themselves directly purchased),
rather than in exchange for shares of a Bond or Equity Fund, may
be exchanged for shares of any class of any Bond or Equity Fund
that the investor is otherwise qualified to purchase, but the
shares received in such an exchange will be subject to the same
sales charge, if any, that they would have been subject to had
they been purchased rather than acquired in exchange for Money
Market Fund shares. If the shares received in exchange are shares
that would be subject to a CDSC if purchased directly, the
holding period governing the CDSC will run from the date of the
exchange, not from the date of the purchase of Money Market
Shares.
This Fund, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into
its shares, if shares of the fund into which exchange is desired
are not available for sale in your state of residence. The Fund
may also modify or terminate this exchange privilege at any time.
In the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take
effect on less than 60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset
value of the shares surrendered for exchange are at least equal
to the minimum investment requirements of the investment company
whose shares are being acquired and (iii) the ownership of the
accounts from which and to which the exchange is made are
identical.
The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone:
800-872-5860 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
Exchanges will be effected at the relative exchange
prices of the shares being exchanged next determined after
receipt by the Agent of your exchange request. The exchange
prices will be the respective net asset values of the shares,
unless a sales charge is to be deducted in connection with an
exchange of shares, in which case the exchange price of shares of
a Bond or Equity Fund will be their public offering price. Prices
for exchanges are determined in the same manner as for purchases
of the Fund's shares. (See "How to Invest in the Fund.")
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period
(see "Tax Effects of Redemptions" and the Additional Statement);
no representation is made as to the deductibility of any such
loss should such occur.
Dividends paid by the Money-Market Funds are taxable,
except to the extent that a portion or all of the dividends paid
by Pacific Capital Tax-Free Cash Assets Trust (a tax-free
money-market Fund) are exempt from regular Federal income tax,
and to the extent that a portion or all of the dividends paid by
Pacific Capital U.S. Government Securities Cash Assets Trust
(which invests in U.S. Treasury obligations) are exempt from
state income taxes. Dividends paid by Aquila Rocky Mountain
Equity Fund and Aquila Cascadia Equity Fund are taxable. If your
state of residence is not the same as that of the issuers of
obligations in which a tax-free municipal bond fund or a tax-free
money-market fund invests, the dividends from that fund may be
subject to income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of such a bond fund or a tax-free money-market fund under
the exchange privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate
and taxable equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase, at
the maximum public offering price (offering price includes any
applicable sales charge) for 1-, 5- and 10-year periods and for a
period since the inception of the Fund, to the extent applicable,
through the end of such periods, assuming reinvestment (without
sales charge) of all distributions. The Fund may also furnish
total return quotations for other periods or based on investments
at various applicable sales charge levels or at net asset value.
For such purposes total return equals the total of all income and
capital gains paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the
original investment, expressed as a percentage of the purchase
price. (See the Additional Statement.)
Current yield reflects the income per share earned by
each of the Fund's portfolio investments; it is calculated by (i)
dividing the Fund's net investment income per share during a
recent 30-day period by (ii) the maximum public offering price on
the last day of that period and by (iii) annualizing the result.
Taxable equivalent yield shows the yield from a taxable
investment that would be required to produce an after-tax yield
equivalent to that of the Fund, which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of
the Fund's yield (calculated as indicated) by one minus a stated
income tax rate and by adding the product to the taxable portion
(if any) of the Fund's yield. (See the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities
and Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will
be paid to the Fund's shareholders. Dividends or distributions
paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted
to shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's distribution rate (calculated as
indicated above). The current distribution rate differs from the
current yield computation because it could include distributions
to shareholders from sources, if any, other than dividends and
interest, such as short-term capital gains or return of capital.
If distribution rates are quoted in advertising, they will be
accompanied by calculations of current yield in accordance with
the formula of the Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum
sales charge, if any, on the purchase of shares, but not on
reinvestment of income dividends. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future
period. The annual report of the Fund contains additional
performance information that will be made available upon request
and without charge.
Description of the Fund and Its Shares
Churchill Tax-Free Trust (the "Trust"), was formed on
March 30, 1987, as a Massachusetts business trust. Its name was
changed from "Churchill Tax-Free Fund of Kentucky" to "Churchill
Tax-Free Trust" in June, 1988. The Fund is the original and only
active portfolio (series) of the Trust. The Fund is an open-end,
non-diversified management investment company. (See "Investment
of the Fund's Assets" for further information about the Fund's
status as "non-diversified.") The Declaration of Trust permits
the Trustees to issue an unlimited number of full and fractional
shares and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. Each share
represents an equal proportionate interest in the Fund with each
other share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance with
their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of
the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund's classes at that time. All shares are presently
divided into four classes; however, if they deem it advisable and
in the best interests of shareholders, the Board of Trustees of
the Fund may create additional classes of shares, which may
differ from each other as provided in rules and regulations of
the Securities and Exchange Commission or by exemptive order. The
Board of Trustees may, at its own discretion, create additional
series of shares, each of which may have separate assets and
liabilities (in which case any such series will have a
designation including the word "Series"). (See the Additional
Statement for further information about possible additional
series.) Shares are fully paid and non-assessable, except as set
forth under the caption "General Information" in the Additional
Statement; the holders of shares have no pre-emptive or
conversion rights, except that Class C Shares automatically
convert to Class A Shares after being held for six years.
In addition to Class A Shares and Class C Shares, which
are offered by this Prospectus, the Fund also has (i)
Institutional Class Shares ("Class Y Shares"), which are offered
only to institutions acting for investors in a fiduciary,
advisory, agency, custodial or similar capacity and are not
offered directly to retail customers and (ii) Financial
Intermediary Class Shares ("Class I Shares"), which are offered
and sold only through certain financial intermediaries. Class Y
Shares and Class I Shares are offered are offered by a separate
prospectus, which can be obtained by calling the Fund at
800-872-5859.
The primary distinction among the Fund's classes of
shares lies in their different sales charge structures and
ongoing expenses, which are likely to be reflected in differing
yields and other measures of investment performance. All four
classes represent interests in the same portfolio of Kentucky
Obligations and have the same rights, except that each class
bears the separate expenses, if any, of its participation in the
Distribution Plan and Shareholder Services Plan and has exclusive
voting rights with respect to such participation.
The Year 2000
Like other financial and business organizations, the Fund
could be adversely affected if computer systems the Fund relies
on do not properly process date-related information and data
involving the year 2000 and after. The Manager is taking steps
that it believes are reasonable to address this problem in its
own computer systems and to obtain assurances that comparable
steps are being taken by the other major service providers to the
Fund. The Manager has also requested the Fund's portfolio manager
to evaluate the potential impact of this problem on the issuers
of securities in which the Fund invests. At this time there can
be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders
will vote on the election of Trustees and on other matters
submitted to the vote of shareholders. Shares vote by classes on
any matter specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Fund, except that the Fund's Board of Trustees may
change the name of the Fund. The Fund may be terminated (i) upon
the sale of its assets to another issuer, or (ii) upon
liquidation and distribution of the assets of the Fund, in either
case if such action is approved by the vote of the holders of a
majority of the outstanding shares of the Fund. If not so
terminated, the Fund will continue indefinitely.
<PAGE>
APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
FOR CLASS A OR CLASS C SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
1-800-872-5860
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship unless
otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.________________________________________________________________
Custodians First Name Middle Initial Last Name
Custodian for ____________________________________________________
Minors First Name Middle Initial Last Name
Under the ___________UGTMA** _____________________________________
Name of State Minors Social Security Number
4. ____________________________________________________
____________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s) of
Trustees in which account will be registered and the name and date of the
Trust Instrument. Account for a Pension or Profit Sharing Plan or Trust may
be registered in the name of the Plan or Trust itself.)
___________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
____________________________________________________
Street or PO Box City
_______________________________(______)______________
State Zip Daytime Phone Number
Occupation:________________________Employer:________________________
Employers Address:__________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you are a
non-U.S. Citizen or resident and not subject to back-up withholding (See
certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT
Indicate method of payment (For either method, make check payment to:
CHURCHILL TAX-FREE FUND OF KENTUCKY)
Indicate class of shares:
__ Class A Shares (Front-Payment Class)
__ Class C Shares (Level-Payment Class)
IF NO SHARE CLASS IS MARKED, INVESTMENT WILL AUTOMATICALLY BE MADE IN CLASS A
SHARES.
__ Initial Investment $_________ (Minimum $1,000)
__ Automatic Investment $________ (Minimum $50)
For Automatic Investments of at least $50 per month, you must complete Step
3, Section A, Step 4, Sections A & B and ATTACH A PRE-PRINTED DEPOSIT SLIP OR
VOIDED CHECK.
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be:___ Reinvested ___Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK showing the
Financial Institution account where I/we would like you to deposit the
dividend. (A Financial Institution is a commercial bank, savings bank or
credit union.)
___ Mail check to my/our address listed in Step 1.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested in
your Churchill Tax-Free Fund of Kentucky Account. To establish this program,
please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or
on the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
toll-free at 1-800-872-5860. To establish this program, please
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. LETTER OF INTENT
APPLICABLE TO CLASS A SHARES ONLY.
See Terms of Letter of Intent and Escrow at the end of this application
___ Yes ___ No
I/We intend to invest in Class A Shares of the Fund during the 13-month
period from the date of my/our first purchase pursuant to this Letter (which
purchase cannot be more than 90 days prior to the date of this Letter), an
aggregate amount (excluding any reinvestment of dividends or distributions)
of at least $25,000 which, together with my/our present holdings of Fund
shares (at public offering price on date of this Letter), will equal or
exceed the minimum amount checked below:
___ $25,000 ___ $50,000 ___ $100,000 ___ $250,000
___ $500,000
D. AUTOMATIC WITHDRAWAL PLAN
(Minimum investment $5,000)
APPLICABLE TO CLASS A SHARES ONLY.
Application must be received in good order at least 2 weeks prior to 1st
actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account, subject
to the terms of the Automatic Withdrawal Plan Provisions set forth below. To
realize the amount stated below, PFPC Inc.(the Agent) is authorized to redeem
sufficient shares from this account at the then current Net Asset Value, in
accordance with the terms below:
Dollar Amount of each withdrawal $ ______________beginning________________ .
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is payable to
a Financial Institution for your account, indicate Financial Institution
name, address and your account number.
_______________________________ ______________________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ______________________________________
Street Financial Institution Street Address
_______________________________ ______________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
E. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquila SM Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
persons telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the Prospectus.
Except for gross negligence in acting upon such telephone instructions to
execute an exchange, and subject to the conditions set forth herein, I/we
understand and agree to hold harmless the Agent, each of the Aquila Funds,
and their respective officers, directors, trustees, employees, agents and
affiliates against any liability, damage, expense, claim or loss, including
reasonable costs and attorneys fees, resulting from acceptance of, or acting
or failure to act upon, this Authorization.
F. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution account listed.
Cash proceeds in any amount from the redemption of shares will be mailed
or wired, whenever possible, upon request, if in an amount of $1,000 or more
to my/our account at a Financial Institution. The Financial Institution
account must be in the same name(s) as this Fund account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ ____________________________________
Account Registration Financial Institution Account Number
_______________________________ ____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ ____________________________________
Street City State Zip
STEP 4 Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by the
Agent, PFPC Inc., and to pay such sums in accordance therewith, provided
my/our account has sufficient funds to cover such drafts or debits. I/We
further agree that your treatment of such orders will be the same as if
I/we personally signed or initiated the drafts or debits. I/We understand
that this authority will remain in effect until you receive my/our written
instructions to cancel this service. I/We also agree that if any such
drafts or debits are dishonored, for any reason, you shall have no
liabilities.
Financial Institution Account Number _______________________________________
Name and Address where my/our account is maintained
Name of Financial Institution______________________________________________
Street Address_____________________________________________________________
City___________________________________________State _________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account is
registered
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila Distributors,
Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted
pursuant to the above authorization shall be subject to the
provisions of the Operating Rules of the National Automated
Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic
debit in the normal course of business initiated by the Agent
(except any loss due to your payment of any amount drawn against
insufficient or uncollected funds), provided that you promptly
notify us in writing of any claim against you with respect to
the same, and further provided that you will not settle or
pay or agree to settle or pay any such claim without the written
permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and expenses
in the event that you dishonor, with or without cause, any such electronic
debit.
STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Fund and has received and
read a current Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution has
insufficient funds, the Fund and its agents may cancel the purchase
transaction and are authorized to liquidate other shares or fractions
thereof held in my/our Fund account to make up any deficiency resulting
from any decline in the net asset value of shares so purchased and any
dividends paid on those shares. I/We authorize the Fund and its agents to
correct any transfer error by a debit or credit to my/our Financial
Institution account and/or Fund account and to charge the account for any
related charges. I/We acknowledge that shares purchased either through
Automatic Investment or Telephone Investment are subject to applicable
sales charges.
- - The Fund, the Agent and the Distributor and their Trustees, directors,
employees and agents will not be liable for acting upon instructions
believed to be genuine, and will not be responsible for any losses
resulting from unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify the identity of the caller. The
Agent will request some or all of the following information: account name
and number; name(s) and social security number registered to the account
and personal identification; the Agent may also record calls. Shareholders
should verify the accuracy of confirmation statements immediately upon
receipt. Under penalties of perjury, the undersigned whose Social Security
(Tax I.D.) Number is shown above certifies (i) that Number is my correct
taxpayer identification number and (ii) currently I am not under IRS
notification that I am subject to backup withholding (line out (ii) if
under notification). If no such Number is shown, the undersigned further
certifies, under penalties of perjury, that either (a) no such Number has
been issued, and a Number has been or will soon be applied for; if a Number
is not provided to you within sixty days, the undersigned understands that
all payments (including liquidations) are subject to 31% withholding under
federal tax law, until a Number is provided and the undersigned may be
subject to a $50 I.R.S. penalty; or (b) that the undersigned is not a
citizen or resident of the U.S.; and either does not expect to be in the
U.S. for 183 days during each calendar year and does not conduct a
business in the U.S. which would receive any gain from the Fund, or is
exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST, ALL
TRUSTEES MUST SIGN.*
__________________________ ____________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ ____________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trust, Corporations or Associations, this form must be accompanied by
proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment,
Expedited Redemption and Direct Deposit of Dividends) are effective 15 days
after this form is received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days after the Agent
receives written notice from you.
- - Either the Fund or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Fund reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by the
terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a Ready
Access features form which may be obtained from Aquila Distributors at
1-800-872-5859 and send it to the Agent together with a "voided" check or
pre-printed deposit slip from the new account. The new Financial
Institution change is effective in 15 days after this form is received
in good order by the Fund's Agent.
TERMS OF LETTER OF INTENT AND ESCROW
By checking Box 3c and signing the Application, the investor
is entitled to make each purchase at the public offering price
applicable to a single transaction of the dollar amount checked
above, and agrees to be bound by the terms and conditions applicable to
Letters of Intent appearing below.
The investor is making no commitment to purchase shares, but if the
investor's purchases within thirteen months from the date of the investor's
first purchase do not aggregate $25,000, or, if such purchases added to the
investor's present holdings do not aggregate the minimum amount specified
above, the investor will pay the increased amount of sales charge prescribed
in the terms of escrow below.
The commission to the dealer or broker, if any, named herein shall be
at the rate applicable to the minimum amount of the investor's specified
intended purchases checked above. If the investor's actual purchases do not
reach this minimum amount, the commissions previously paid to the
dealer will be adjusted to the rate applicable to the investor's total
purchases. If the investor's purchases exceed the dollar amount of the
investor's intended purchases and pass the next commission break-point,
the investor shall receive the lower sales charge, provided that the
dealer returns to the Distributor the excess of commissions previously
allowed or paid to him over that which would be applicable to the
amount of the investor's total purchases.
The investor's dealer or broker shall refer to this Letter of
Intent in placing any future purchase orders for the investor
while this Letter is in effect.
The escrow shall operate as follows:
1. Out of the initial purchase (or subsequent purchases if necessary), 3% of
the dollar amount specified in the Letter of Intent (computed to the
nearest full share) shall be held in escrow in shares of the Fund by the
Agent. All dividends and any capital distributions on the escrowed shares
will be credited to the investor's account.
2. If the total minimum investment specified under the Letter is completed
within a thirteen-month period, the escrowed shares will be promptly
released to the investor. However, shares disposed of prior to completion
of the purchase requirement under the Letter will be deducted from the
amount required to complete the investment commitment.
3. If the total purchases pursuant to the Letter are less than the amount
specified in the Letter as the intended aggregate purchases, the investor
must remit to the Distributor an amount equal to the difference between
the dollar amount of sales charges actually paid and the amount of
sales charges which would have been paid if the total amount
purchased had been made at a single time. If such difference in sales
charges is not paid within twenty days after receipt of a request
from the Distributor or the dealer, the Distributor will, within sixty
days after the expiration of the Letter, redeem the number of escrowed
shares necessary to realize such difference in sales charges. Full
shares and any cash proceeds for a fractional share remaining after
such redemption will be released to the investor. The escrow of shares
will not be released until any additional sales charge due has been
paid as stated in this section.
4. By checking Box 3c and signing the Application, the investor irrevocably
constitutes and appoints the Agent or the Distributor as his attorney to
surrender for redemption any or all escrowed shares on the books of the
Fund.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees
to the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan (the "Plan")
as agent for the person (the "Planholder") who executed the Plan
authorization.
2. Certificates will not be issued for shares of the Fund purchased for and
held under the Plan, but the Agent will credit all such shares to the
Planholder on the records of the Fund. Any share certificates now held by
the Planholder may be surrendered unendorsed to the Agent with the
application so that the shares represented by the certificate may be held
under the Plan.
3. Dividends and distributions will be reinvested in shares of the Fund at
Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments will be
made at the Net Asset Value per share in effect at the close of business
on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address to
which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder should
allow at least two weeks time in mailing such notification before the
requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice (in
proper form in accordance with the requirements of the then current
Prospectus of the Fund) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Fund's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Fund. The Agent will also terminate the Plan upon receipt
of evidence satisfactory to it of the death or legal incapacity of the
Planholder. Upon termination of the Plan by the Agent or the Fund, shares
remaining unredeemed will be held in an uncertificated account in the name
of the Planholder, and the account will continue as a dividend-
reinvestment, uncertificated account unless and until proper instructions
are received from the Planholder, his executor or guardian, or as
otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action taken
or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for the
Fund, the Planholder will be deemed to have appointed any successor
transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while simultaneously
making regular purchases. While an occasional lump sum investment may be
made, such investment should normally be an amount equivalent to three
times the annual withdrawal or $5,000, whichever is less.
<PAGE>
INVESTMENT SUB-ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
INVESTMENT ADVISER, ADMINISTRATOR AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Diana P. Herrmann
Theodore T. Mason
William J. Nightingale
Douglas Dean
Anne J. Mills
James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights.......................................
Table of Expenses................................
Financial Highlights.............................
Introduction.....................................
Investment Of The Fund's Assets..................
Investment Restrictions.........................
Net Asset Value Per Share.......................
Alternative Purchase Plans......................
How To Invest In The Fund.......................
How To Redeem Your Investment...................
Automatic Withdrawal Plan.......................
Management Arrangements.........................
Dividend And Tax Information....................
Exchange Privilege..............................
General Information.............................
Application and Letter of Intent
AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY
A tax-free
income investment
[LOGO]
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Churchill Tax-Free Fund of Kentucky
380 Madison Avenue, Suite 2300
New York, NY 10017
800-USA-KTKY (800-872-5859)
212-697-6666
Prospectus
Class Y Shares April 30, 1998
Class I Shares
The Fund is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Kentucky
and Federal income taxes as is consistent with preservation of
capital by investing in municipal obligations which pay interest
exempt from Kentucky State and Federal income taxes. These
municipal obligations must, at the time of purchase, either be
rated within the four highest credit ratings (considered as
investment grade) assigned by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, or, if unrated, be determined to
be of comparable quality by the Fund's investment sub-adviser,
Banc One Investment Advisors Corporation.
This Prospectus concisely states information about the
Fund that you should know before investing. A Statement of
Additional Information about the Fund dated April 30, 1998 (the
"Additional Statement") has been filed with the Securities and
Exchange Commission and is available without charge upon written
request to the Fund's Shareholder Servicing Agent, at the address
given below, or by calling the telephone number(s) given below.
The Additional Statement contains information about the Fund and
its management not included in this Prospectus. The Additional
Statement is incorporated by reference in its entirety in this
Prospectus. Only when you have read both the Prospectus and the
Additional Statement are all material facts about the Fund
available to you.
SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY BANC ONE CORPORATION OR ITS BANK OR
NON-BANK AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE FUND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY OR GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT
OR ANY STATE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
For Purchase, Redemption or Account inquiries contact
the Fund's Shareholder Servicing Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
Call 800-872-5860 toll free
For General Inquiries & Yield Information,
Call 800-872-5859 toll free or 212-697-6666
This Prospectus Should Be Read and Retained For Future Reference
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
HIGHLIGHTS
Churchill Tax-Free Fund of Kentucky, founded by Aquila
Management Corporation (the "Manager") in 1987 and one of the
Aquilasm Group of Funds, is an open-end mutual fund which invests
in tax-free municipal bonds, the kind of obligations issued by
the Commonwealth of Kentucky, its counties and various other
local authorities to finance such long-term public purpose
projects as schools, universities, housing, transportation,
utilities, hospitals and water and sewer facilities throughout
Kentucky. (See "Introduction.")
Tax-Free Income - The municipal obligations in which the
Fund invests pay interest which is exempt from regular Federal
income taxes and Commonwealth of Kentucky income and ad valorem
taxes. Dividends paid by the Fund from this income are likewise
free of such taxes. It is, however, possible that in certain
circumstances a small portion of the dividends paid by the Fund
will be subject to income taxes. The Federal alternative minimum
tax may apply to some investors, but its impact will be limited
since not more than 20% of the Fund's net assets can be invested
in obligations paying interest which is subject to this tax. The
receipt of exempt-interest dividends from the Fund may result in
some portion of social security payments or railroad retirement
benefits being included in taxable income. Capital gains
distributions, if any, are taxable. (See "Dividend and Tax
Information.")
Investment Grade - The Fund will acquire only those
municipal obligations which, at the time of purchase, are within
the four highest credit ratings assigned by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or are determined
by the Sub-Adviser to be of comparable quality. In general there
are nine separate credit ratings, ranging from the highest to the
lowest credit ratings for municipal obligations. Obligations
within the top four ratings are considered "investment grade,"
but those in the fourth rating may have speculative
characteristics as well. (See "Investment of the Fund's
Assets.")
Alternative Purchase Plans -- The Fund provides
alternative ways to invest. (See "How to Invest in the Fund.")For
this purpose the Fund offers classes of shares, which differ in
their expense levels and sales charges. This Prospectus
offers:
Institutional Class Shares ("Class Y Shares")
are offered only to institutions acting for investors
in a fiduciary, advisory, agency, custodial or similar
capacity, and are not offered directly to retail
customers. Class Y Shares are offered at net asset
value with no sales charge, no redemption fee, no
contingent deferred sales charge and no distribution
fee. (See "How to Purchase Class Y Shares.")
Financial Intermediary Class Shares ("Class I
Shares") are offered and sold only through financial
intermediaries with which the Aquila Distributors, Inc.
(the "Distributor") has entered into sales agreements,
and are not offered directly to retail customers. Class
I Shares are offered at net asset value with no sales
charge and no redemption fee or contingent deferred
sales charge, although a financial intermediary may
charge a fee for effecting a purchase or other
transaction on behalf of its customers. Class I Shares
may carry a distribution fee of up to 0.25 of 1% of
average annual net assets allocable to Class I Shares,
currently 0.10 of 1% of such net assets, and a services
fee of 0.25 of 1% of such assets. (See "How to Purchase
Class I Shares.")
The Fund's other classes of shares, Front-Payment Class
Shares ("Class A Shares") and Level-Payment Class Shares ("Class
C Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Fund and Its Shares.")
At the date of the Prospectus, Class Y Shares and Class I
Shares are registered for sale only in certain states. (See "How
to Invest in the Fund.") If Class Y Shares or Class I Shares of
the Fund are sold outside those states, except to certain
institutional investors, the Fund can redeem them. If your state
of residence is not Kentucky, dividends from the Fund may be
subject to income taxes of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Fund.
Initial Investment - - You may open your account for
Class Y Shares with any purchase of $100,000 or more for
fiduciary accounts and $250,000 for all other eligible
purchasers. These minimums do not apply to shareholders with
accounts open on April 30, 1998 (See the Application, which is in
the back of the Prospectus.) Class I Shares are sold only through
financial intermediaries, which may have their own minimum
investment requirement. (See "How to Invest in the Fund.")
Additional Investments - You may make additional
investments in Class Y Shares at any time and in any amount,
directly or, if in an amount of $50 or more, through the
convenience of having your investment electronically transferred
from your financial institution account into the Fund by
Automatic Investment or Telephone Investment. Additional
investments in Class I Shares can be made only through financial
intermediaries, which may have their own requirements for
subsequent investments. (See "How to Invest in the Fund.")
Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends on Class Y Shares are paid by
check mailed to you, directly deposited into your financial
institution account or automatically reinvested without sales
charge in additional Class Y Shares at the then-current net asset
value. All arrangements for the payment of dividends with respect
to Class I Shares, including reinvestment of dividends, must be
made through financial intermediaries. (See "Dividend and Tax
Information.")
Many Different Issues - You have the advantages of a
portfolio which consists of over 171 issues with different
maturities. (See "Investment of the Fund's Assets.")
Local Portfolio Management - Banc One Investment Advisors
Corporation (the "Sub-Adviser") serves as the Fund's investment
Sub-Adviser, providing experienced local professional management.
The Sub-Adviser is a wholly-owned subsidiary of BANC ONE
CORPORATION ("Banc One"). As of June 30, 1997 the Sub-Adviser had
$20 billion under management. Banc One is a multi-bank holding
company, incorporated under the laws of the State of Ohio. As of
June 30, 1997, Banc One operated with more than 1,500 offices in
the states of Arizona, Colorado, Illinois, Indiana, Kentucky,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. As of that date, Banc One, its affiliated banks and
its non-bank subsidiaries had total assets of approximately
$140.7 billion.The Sub-Adviser services Kentucky clients at
offices in Louisville and Lexington.
The Fund is obligated to pay investment advisory fees at
the rate of 0.40 of 1% of average annual net assets to its
Manager which pays fees at the annual rate of 0.14 of 1% of such
net assets to the Sub-Adviser. Both of these fees are subject to
increase were the Fund to discontinue certain payments under the
Distribution Plan, so that together these fees would be payable
at an aggregate annual rate of up to 0.50 of 1%. (See "Table of
Expenses," "Distribution Plan" and "Management Arrangements.")
Some or all of these fees may be waived by the Manager and the
Sub-Adviser. (See "Table of Expenses" and "Management
Arrangements.")
Redemptions - Liquidity - You may redeem any amount of
your Class Y Shares account on any business day at the next
determined net asset value by telephone, FAX or mail request,
with proceeds being sent to a predesignated financial
institution, if you have elected Expedited Redemption. Proceeds
will be wired or transferred through the facilities of the
Automated Clearing House, wherever possible, upon request, if in
an amount of $1,000 or more, or will be mailed. For these and
other redemption procedures see "How to Redeem Your Investment."
All arrangements for redemptions of Class I Shares must be made
through financial intermediaries. The Fund does not impose
redemption fees for redemption of Class Y Shares or Class I
Shares. However, financial intermediaries may charge a fee for
effecting redemptions.
Certain Stabilizing Measures - The Fund will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")
Exchanges - You may exchange Class Y Shares of the Fund
into Class Y Shares of other Aquila-sponsored tax-free municipal
bond mutual funds or two Aquila-sponsored equity funds. You may
also exchange them into shares of the Aquila-sponsored money
market funds. Similar exchangability is available to Class I
Shares to the extent that other Aquila-sponsored funds are made
available to its customers by a financial intermediary. The
exchange prices will be the respective net asset values of the
shares. (See "Exchange Privilege.")
Risks and Special Considerations - The share price,
determined on each business day, varies with the market prices of
the Fund's portfolio securities, which fluctuate with market
conditions including prevailing interest rates. Accordingly, the
proceeds of redemptions may be more or less than your original
cost. (See "Factors Which May Affect the Value of the Fund's
Investments and Their Yields.") The Fund's assets, being
primarily or entirely Kentucky issues, are subject to economic
and other conditions affecting Kentucky. (See "Risk Factors and
Special Considerations Regarding Investment in Kentucky
Obligations.") Moreover, the Fund is classified as a
"non-diversified" investment company, because it may choose to
invest in the obligations of a relatively limited number of
issuers. (See "Investment of the Fund's Assets.") The Fund may
also, to a limited degree, buy and sell futures contracts and
options on futures contracts, although since inception the Fund
has not done so and has no present intention to do so. There may
be risks associated with these practices. (See "Certain
Stabilizing Measures.")
Statements and Reports - You will receive statements of
your Class Y Shares account monthly as well as each time you add
to your account or take money out. Financial intermediaries
provide their own statements of Class I Shares accounts.
Additionally, you will receive a Semi-Annual Report and an
audited Annual Report.
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
TABLE OF EXPENSES
Class I Class Y
Shareholder Transaction Expenses Shares Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchase None None
(as a percentage of offering price)
Maximum Sales Charge Imposed on Reinvested Dividend None None
Maximum Deferred Sales Charge None None
Redemption Fees None None
Exchange Fee None None
Annual Fund Operating Expenses (1) Arrangements effective
May 1, 1998 (as a percentage of average net assets)
Management Fee (2) 0.40% 0.40%
12b-1 Fee (3) 0.10% None
All Other Expenses (4) 0.43% 0.18%
Total Fund Operating Expenses (4) 0.93% 0.58%
Example (5)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
Class I Shares $9 $30 $51 $114
Class Y Shares $6 $19 $32 $ 73
<FN>
(1) Estimated based upon amounts incurred by the Fund's Class Y Shares
during its most recent fiscal year, restated to reflect current arrangements.
</FN>
<FN>
(2) The Fund pays the Manager an advisory fee at the annual rate of
0.40 of 1% of average annual net assets; the Manager pays the Sub-Advisor
a sub-advisory fee at the annual rate of 0.14 of 1% of average annual net
assets. (See "Management arrangements.")
</FN>
<FN>
(3) Current rates; up to 0.25% can be authorized.
</FN>
<FN>
(4) Does not reflect a 0.01 % expense offset in custodian fees received
for uninvested cash balances. Reflecting this offset and based on estimates
for Class I, all other expenses, and total Fund operating expenses for
Class I shares would have been 0.42%, and 0.92%, respectively; for Class Y
Shares these expenses would have been 0.17% and 0.57, respectively.
Operating expenses for Class I Shares include a 0.25% service fee. (See
"Shareholder Services Plan for Class I Shares.")
</FN>
<FN>
(5) The expense example is based upon the above shareholder transaction
expenses. It is also based upon amounts at the beginning of each year
which includes the prior year's assumed results. A year's results consist
of an assumed 5% annual return less total operating expenses; the expense
ratio was applied to an assumed average balance (the year's starting
investment plus one-half the year's results). Each figure represents the
cumulative expenses so determined for the period specified.
</FN>
</TABLE>
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL MUTUAL FUNDS USE
THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING THE ABOVE EXAMPLE.
THE ASSUMED 5% ANNUAL RETURN SHOULD NOT BE INTERPRETED AS A PREDICTION OF
AN ACTUAL RETURN, WHICH MAY BE HIGHER OR LOWER.
The purpose of the above table is to assist the investor in understanding
the various costs that an investor in the Fund will bear directly or
indirectly.
<PAGE>
The table shown below for Class A Shares is for information purposes
only. Class A Shares are not offered by this Prospectus. No historical
information exists for Class I Shares, which were established on
April 30, 1998.
<TABLE>
<CAPTION>
CHURCHILL TAX-FREE FUND OF KENTUCKY
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The following table of Financial Highlights as it relates to the
five years ended December 31, 1997 has been audited by KPMG Peat Marwick
LLP, independent auditors, whose report thereon is included with the Fund's
financial statements contained in its Annual Report, which are incorporated
by reference into the Additional Statement. The information provided in the
table should be read in conjunction with the financial statements and
related notes. The Fund's Annual Report contains additional information
about the Fund's performance and is available upon request without charge.
On October 16, 1989, Aquila Management Corporation, originally the Fund's
Sub-Adviser and Administrator, became Administrator only. Effective
September 11, 1995, Banc One Investment Advisors Corporation became the
Fund's Investment Adviser, replacing PNC Bank, Kentucky, Inc. (See
"Management Arrangements.")
Class A(1) Class Y(4)
Year Ended December 31, Year Ended Period Ended
1997 1996 1995 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $10.55 $10.71 $9.97 $10.55 $10.47
Income from Investment
Operations:
Net investment
income............... 0.55 0.55 0.60 0.56 0.43
Net gain (loss) on
securities (both
realized and
unrealized).......... 0.27 (0.12) 0.74 0.29 0.11
Total from Investment
Operations........... 0.82 0.43 1.34 0.85 0.54
Less Distributions:
Dividends from
net investment
income............... (0.55) (0.59) (0.60) (0.57) (0.46)
Distributions from
capital gains........ (0.01) - - (0.01) -
Total Distributions.. (0.56) (0.59) (0.60) (0.58) (0.46)
Net Asset Value,
End of Period $10.81 $10.55 $10.71 $10.82 $10.55
Total Return (not
(reflecting
sales charge)(%)....... 8.08 4.17 13.75 8.34 5.24(1)
Ratios/Supplemental Data
Net Assets, End of
Period ($ in thousands) 226,477 222,889 230,270 8,957 5,823
Ratio of Expenses
to Average Net
Assets(%)............... 0.72 0.74 0.79 0.56 0.56(2)
Ratio of Net Investment
Income to Average Net
Assets(%)............... 5.20 5.53 5.75 5.32 5.42(2)
Portfolio Turnover
Rate(%)................. 22.39 8.94 17.09 22.39 8.94
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and the
expense offset in custodian fees for uninvested cash balances would have been:
Net Investment
Income($).............. 0.55 0.55 0.60 0.56 0.43
Ratio of Expenses
to Average Net
Assets(%).............. 0.73 0.75 0.80 0.57 0.58(2)
Ratio of Net Investment
Income to Average
Net Assets(%).......... 5.19 5.22 5.74 5.31 5.41(2)
<CAPTION>
1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C>
$10.93 $10.49 $10.39 $10.00 $10.06 $9.53 $9.26
0.60 0.62 0.66 0.66 0.65 0.68 0.65
(0.96) 0.47 (0.19) 0.41 (0.03) 0.53 0.26
(0.36) 1.09 0.85 1.07 0.62 1.21 0.91
(0.60) (0.62) (0.66) (0.66) (0.68) (0.68) (0.64)
- (0.03) (0.09) (0.02) - - -
(0.60) (0.65) (0.75) (0.68) (0.68) (0.68) (0.64)
$9.97 $10.93 $10.49 $10.39 $10.00 $10.06 $9.53
(3.31) 10.50 8.48 10.97 10.49 6.64 13.09
232,656 258,632 192,600 114,798 66,076 35,652 19,007
0.72 0.59 0.42 0.27 0.10 0.08 0.10
5.81 5.67 6.21 6.53 6.60 6.94 6.87
32.25 31.29 50.33 16.69 7.67 3.63 10.51
0.60 0.60 0.63 0.60 0.59 0.57 0.58
0.73 0.73 0.68 0.84 0.76 1.09 1.21
5.80 5.52 5.95 5.96 5.94 5.92 5.79
<FN>
(1)Not annualized.
</FN>
<FN>
(2)Annualized.
</FN>
<FN>
(3) Designated as Class A Shares on April 1, 1996.
</FN>
<FN>
(4) New Class of Shares established on April 1, 1996.
</FN>
<FN>
*For the period from April 1, 1996 to December 31, 1996.
</FN>
</TABLE>
<PAGE>
INTRODUCTION
The Fund's shares are designed to be a suitable investment
for investors who seek income exempt from Kentucky State and
regular Federal income taxes.
You may invest in shares of the Fund as an alternative to
direct investments in Kentucky Obligations, as defined below,
which may include obligations of certain non-Kentucky issuers.
The Fund offers you the opportunity to keep assets fully invested
in a vehicle that provides a professionally managed portfolio of
Kentucky Obligations which may, but not necessarily will, be more
diversified, higher yielding or more stable and more liquid than
you might be able to obtain on an individual basis by direct
purchase of Kentucky Obligations. Through the convenience of a
single security consisting of shares of the Fund, you are also
relieved of the inconvenience associated with direct investments
of fixed denominations, including the selecting, purchasing,
handling, monitoring call provisions and safekeeping of Kentucky
Obligations.
Kentucky Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes;
bond anticipation notes; construction loan notes; and floating
and variable rate demand notes. Municipal obligations include
municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment. The
purposes for which municipal obligations such as bonds are issued
include the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing,
mass transportation, streets and water and sewer works. Other
public purposes for which municipal obligations may be issued
include the refunding of outstanding obligations, the obtaining
of funds for general operating expenses and the obtaining of
funds to lend to other public institutions and facilities.
INVESTMENT OF THE FUND'S ASSETS
In seeking its objective of providing as high a level of
current income which is exempt from both Kentucky State and
regular Federal income taxes as is consistent with the
preservation of capital, the Fund will invest in Kentucky
Obligations (as defined below). There is no assurance that the
Fund will achieve its objective, which is a fundamental policy of
the Fund. (See "Investment Restrictions.")
As used in the Prospectus and the Additional Statement, the
term "Kentucky Obligations" means obligations, including those of
certain non-Kentucky issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate
counsel, is exempt from regular Federal income taxes and Kentucky
income taxes. Although exempt from regular Federal income tax,
interest paid on certain types of Kentucky Obligations, and
dividends which the Fund might pay from this interest, are
preference items as to the Federal alternative minimum tax; for
further information, see "Dividend and Tax Information." As a
fundamental policy, at least 80% of the Fund's net assets will be
invested in Kentucky Obligations the income paid upon which will
not be subject to the alternative minimum tax; accordingly, the
Fund can invest up to 20% of its net assets in obligations which
are subject to the Federal alternative minimum tax. The Fund may
refrain entirely from purchasing these types of Kentucky
Obligations. (See "Dividend and Tax Information.")
The non-Kentucky bonds or other obligations the interest on
which is exempt under present law from regular Federal and
Kentucky income taxes are those issued by or under the authority
of Guam, the Northern Mariana Islands, Puerto Rico and the Virgin
Islands. The Fund will not purchase Kentucky Obligations of
non-Kentucky issuers unless Kentucky Obligations of Kentucky
issuers of the desired quality, maturity and interest rate are
not available. As a Kentucky-oriented fund, at least 65% of the
Fund's total assets will be invested in Kentucky Obligations of
Kentucky issuers. The Fund invests only in Kentucky Obligations
and, possibly, in Futures and options on Futures (see below) for
protective (hedging) purposes.
In general, there are nine separate credit ratings,
ranging from the highest to the lowest quality standards for
municipal obligations. So that the Fund will have a portfolio of
quality oriented (investment grade) securities, the Kentucky
Obligations which the Fund will purchase must, at the time of
purchase, either (i) be rated within the four highest credit
ratings assigned by Moody's Investors Service, Inc. ("Moody's")
or Standard & Poor's Corporation ("S&P"); or (ii) if unrated, be
determined to be of comparable quality to municipal obligations
so rated by Banc One Investment Advisors Corporation (the "Sub-
Adviser"), subject to the direction and control of the Fund's
Board of Trustees. Municipal obligations rated in the fourth
highest credit rating are considered by such rating agencies to
be of medium quality and thus may present investment risks not
present in more highly rated obligations. Such bonds lack
outstanding investment characteristics and may in fact have
speculative characteristics as well; changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is
the case for higher grade bonds. If after purchase the rating of
any rated Kentucky Obligation is downgraded such that it could
not then be purchased by the Fund, or, in the case of an unrated
Kentucky Obligation, if the Sub-Adviser determines that the
unrated obligation is no longer of comparable quality to those
rated obligations which the Fund may purchase, it is the current
policy of the Fund to cause any such obligation to be sold as
promptly thereafter as the Sub-Adviser in its discretion
determines to be consistent with the Fund's objectives; such
obligation remains in the Fund's portfolio until it is sold. In
addition, because a downgrade often results in a reduction in the
market price of a downgraded obligation, sale of such an
obligation may result in a loss. (See Appendix A to the
Additional Statement for further information as to these
ratings.) The Fund can purchase industrial development bonds only
if they meet the definition of Kentucky Obligations, i.e., the
interest on them is exempt from Kentucky State and regular
Federal income taxes.
The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940
Act"). The Fund also intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code"). One of the tests for such qualification under the
Code is, in general, that at the end of each fiscal quarter of
the Fund, at least 50% of its assets must consist of (i) cash;
and (ii) securities which, as to any one issuer, do not exceed 5%
of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment
company, it would have to meet a similar test as to 75% of its
assets. The Fund may therefore not have as much diversification
among securities, and thus diversification of risk, as if it had
made this election under the 1940 Act. In general, the more the
Fund invests in the securities of specific issuers, the more the
Fund is exposed to risks associated with investments in those
issuers. The Fund's assets, being primarily or entirely Kentucky
issues, are accordingly subject to economic and other conditions
affecting Kentucky. (See "Risk Factors and Special Considerations
Regarding Investment in Kentucky Obligations.")
Certain Stabilizing Measures
The Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash
and cash equivalents in attempting to protect against declines
in the value of its investments and other market risks. There
can, however, be no assurance that these will be successful.
Although the Fund has no current intention of using futures and
options, to the limited degree described below, these may be used
to attempt to hedge against changes in the market price of the
Fund's Kentucky Obligations caused by interest rate fluctuations.
Futures and options could also provide a hedge against increases
in the cost of securities the Fund intends to purchase.
Although it does not currently do so, and since inception
has not done so, the Fund may buy and sell futures contracts
relating to indices on municipal bonds ("Municipal Bond Index
Futures") and to U.S. government securities ("U.S. Government
Securities Futures"); both kinds of futures contracts are
"Futures." The Fund may also write and purchase put and call
options on Futures. As a matter of fundamental policy the Fund
will not buy or sell a Future or an option on a Future if
thereafter more than 10% of its net assets would be in initial or
variation margin on such Futures and options on them, and in
premiums on such options. The Fund will not enter into Futures or
options for which the aggregate initial margins and premiums paid
for options exceed 5% of the fair market value of the Fund's
assets. (See the Additional Statement.) Under normal market
conditions, the Fund cannot purchase or sell Municipal Bond Index
Futures, U.S. Government Securities Futures, or options on
Futures if thereafter more than 20% of its total assets would
consist of cash, margin deposits on such Futures and margin
deposits and premiums on such options, except for temporary
defensive purposes, i.e., in anticipation of a decline or
possible decline in the value of Kentucky Obligations.
The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and
the prices of Futures or options purchased or sold by the Fund;
(ii) incorrect forecasts by the Sub-Adviser concerning interest
rates which may result in the hedge being ineffective; and (iii)
possible lack of a liquid secondary market for a Future or
option; the resulting inability to close a Futures or options
position could adversely affect the Fund's hedging ability. For
a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the security
being hedged. The risk of imperfect correlation of these price
changes is increased as the composition of the Fund's portfolio
is divergent from the debt securities underlying the hedging
instrument. To date, the Sub-Adviser has had no experience in the
use of Futures or options on them.
The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits"
established by commodity exchanges which restrict the amount of
change in the contract price allowed during a single trading day.
Thus, once a daily limit is reached, no further trades may be
entered into beyond the limit, thereby preventing the liquidation
of open positions. Prices have in the past reached the daily
limit on a number of consecutive trading days. For further
information about Futures and options, see the Additional
Statement.
When and if the Fund determines to use Futures and options,
the Prospectus will be supplemented.
Floating and Variable Rate Demand Notes
Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one
year, but permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each
case upon not more than 30-days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days'
notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is
adjusted automatically at specified intervals.
Participation Interests
The Fund may purchase from financial institutions
participation interests in Kentucky Obligations (such as
industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided
interest in the underlying Kentucky Obligations in the proportion
that the Fund's participation interest bears to the total amount
of the underlying Kentucky Obligations. All such participation
interests must meet the Fund's credit requirements. (See
"Limitation to 10% as to Certain Investments.")
When-Issued and Delayed Delivery Purchases
The Fund may buy Kentucky Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring
them. The Kentucky Obligations so purchased are subject to market
fluctuation and no interest accrues to the Fund until delivery
and payment take place; their value at the delivery date may be
less than the purchase price. The Fund cannot enter into
when-issued commitments exceeding in the aggregate 15% of the
market value of the Fund's total assets, less liabilities other
than the obligations created by when-issued commitments. If the
Fund chooses to dispose of the right to acquire a when-issued
obligation prior to its acquisition, it could, as with the
disposition of any other portfolio holding, incur a gain or loss
due to market fluctuation; any such gain would be a taxable
short-term gain. The Fund places an amount of assets equal in
value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account, which is marked to market every business day.
(See the Additional Statement for further information.)
Limitation to 10% as to Certain Investments
The Fund cannot purchase Kentucky Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does
not include any Kentucky Obligations as to which the Fund can
exercise the right to demand payment in full within three days
and as to which there is a secondary market. Floating and
variable rate demand notes and participation interests (including
municipal lease/purchase obligations) are considered illiquid
unless determined by the Board of Trustees to be readily
marketable. (See the Additional Statement.)
Current Policy as to Certain Obligations
The Fund will not invest more than 25% of its total assets
in (i) Kentucky Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.
Factors Which May Affect the Value of the
Fund's Investments and Their Yields
The value of the Kentucky Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market,
credit and economic factors as well. If the prevailing interest
rates go up after the Fund buys Kentucky Obligations, the value
of these obligations will normally go down; if these rates go
down, the value of these obligations will normally go up. Changes
in value and yield based on changes in prevailing interest rates
may have different effects on short-term Kentucky Obligations
than on long-term obligations. Long-term obligations (which often
have higher yields) may fluctuate in value more than short-term
ones. For this reason, the Fund may, to achieve a defensive
position, shorten the average maturity of its portfolio.
Risk Factors and Special Considerations
Regarding Investment in Kentucky Obligations
The following is a discussion of the general factors that
might influence the ability of Kentucky issuers to repay
principal and interest when due on the Kentucky Obligations
contained in the portfolio of the Fund. Such information is
derived from sources that are generally available to investors
and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.
The Commonwealth of Kentucky continues to rank among the
top coal producers in the country. Tobacco is the dominant
agricultural product. Kentucky ranks second among the states in
the total cash value of tobacco raised. There is significant
diversification in the manufacturing sector of the Commonwealth's
economy. A few examples include the production of automobiles and
trucks, heavy machinery and other durable goods, appliances and
computer equipment. There has been recent growth in auto
parts/components producers that supply the Toyota Motors facility
in Georgetown, Kentucky. Tobacco processing plants and
distilleries produce items for export throughout the world.
Thoroughbred horse breeding and racing are important to the
economy, as is tourism.
Economic problems include a continuing high unemployment
rate in the non-urbanized areas of the State. The Coal Severance
Tax is a significant revenue producer for the state and its
political subdivisions, and any substantial decrease in the
amount of coal or other minerals produced could result in revenue
shortfalls. Additionally, any federal legislation affecting
adversely the tobacco and/or cigarette industry would have a
negative impact on Kentucky's economy. Although revenue
obligations of the state or its political subdivisions may be
payable from a specific project, there can be no assurances that
further economic difficulties and the resulting impact on state
and local government finances will not adversely affect the
market value of the bonds issued by Kentucky municipalities or
political subdivisions or the ability of the respective entities
to pay debt service. Major legislative initiatives in the area of
education reform and medicaid expenses are having an impact on
the Commonwealth's financial profile.
The Commonwealth of Kentucky relies upon sales and use tax,
individual income tax, property tax, corporate income tax,
insurance premium tax, alcohol beverage tax, corporate license
tax, cigarette tax, and horse racing tax for its revenue. The
cities, counties and other local governments are essentially
limited to property taxes, occupational license taxes, utility
taxes, transit and restaurant meals taxes and various license
fees for their revenue. Obligations of non-Kentucky issuers are
subject to the risks of general economic and other factors
affecting those issuers.
Because of constitutional limitations, the Commonwealth
of Kentucky cannot enter into a financial obligation of more than
two years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than
one year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal
revenue bonds in other States. (See the Additional
Statement.)
INVESTMENT RESTRICTIONS
The Fund has a number of policies about what it can and
cannot do. Certain of these policies, identified in the
Prospectus and in the Additional Statement as "fundamental
policies," cannot be changed unless the holders of a "majority,"
as defined in the 1940 Act, of the Fund's outstanding shares vote
to change them. (See the Additional Statement for a definition of
such a majority.) All other policies can be changed from time to
time by the Board of Trustees without shareholder approval. Some
of the more important of the Fund's fundamental policies, not
otherwise identified in the Prospectus, are set forth below;
others are listed in the Additional Statement.
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than the Kentucky
Obligations meeting the standards stated under "Investment of the
Fund's Assets"; the Fund can also purchase and sell Futures and
options on them within the limits there discussed.
2. The Fund has industry investment requirements.
The Fund cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry; the Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.
3. The Fund cannot make loans.
The Fund can buy those Kentucky Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.
4. The Fund can borrow only in limited amounts for special
purposes.
The Fund can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage
or pledge its assets only in connection with such borrowing and
only up to the lesser of the amounts borrowed or 5% of the value
of its total assets. However, this shall not prohibit margin
arrangements in connection with the purchase or sale of Municipal
Bond Index Futures, U.S. Government Securities Futures or options
on them, or the payment of premiums on those options. Interest on
borrowings would reduce the Fund's income. Except in connection
with borrowings, the Fund will not issue senior securities. The
Fund will not purchase any Kentucky Obligations, Futures or
options on Futures while it has any outstanding borrowings which
exceed 5% of the value of its total assets.
NET ASSET VALUE PER SHARE
The net asset value of the shares of each of the Fund's
classes of shares is determined as of 4:00 p.m., New York time,
on each day that the New York Stock Exchange is open (a "business
day"), by dividing the value of the Fund's net assets (i.e., the
value of the assets less liabilities) allocable to each class by
the total number of shares of such class then outstanding.
Determination of the value of the Fund's assets is subject to the
direction and control of the Fund's Board of Trustees. In
general, it is based on market value, except that Kentucky
Obligations maturing in 60 days or less are generally valued at
amortized cost; see the Additional Statement for further
information.
HOW TO INVEST IN THE FUND
This Prospectus offers two separate classes of shares.
All classes represent interests in the same portfolio of Kentucky
Obligations.
Institutional Class Shares ("Class Y Shares") are
offered only to institutions acting for investors in a
fiduciary, advisory, agency, custodial or similar
capacity, and are not offered directly to retail
customers. Class Y Shares are offered at net asset
value with no sales charge, no redemption fee, no
contingent deferred sales charge and no distribution
fee.
Financial Intermediary Class Shares ("Class I
Shares") are offered and sold only through financial
intermediaries with which the Aquila Distributors, Inc.
(the "Distributor") has entered into sales agreements,
and are not offered directly to retail customers. Class
I Shares are offered at net asset value with no sales
charge and no redemption fee or contingent deferred
sales charge, although a financial intermediary may
charge a fee for effecting a purchase or other
transaction on behalf of its customers. Class I Shares
may carry a distribution fee of up to 0.25 of 1% of
average annual net assets allocable to Class I Shares,
currently 0.10 of 1% of such net assets, and a service
fee of 0.25 of 1% of such assets. (See "Distribution
Plan" and "Shareholder Services Plan for Class I
Shares.")
The Fund's other classes of shares, Front-Payment Class
Shares ("Class A Shares") and Level-Payment Class Shares, ("Class
C Shares"), are not offered by this Prospectus. (See "General
Information - Description of the Fund and Its Shares.")
At the date of the Prospectus, Class Y Shares of the Fund
are registered for sale only in Kentucky, Alabama, District of
Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Missouri,
New Jersey, New York and Pennsylvania; Class I Shares of the Fund
are registered for sale only in Kentucky and New York.
If you do not reside in one of those states you should
not purchase shares of the Fund. If shares are sold outside of
those states except to certain institutional investors, the Fund
can redeem them. Such a redemption may result in a loss to you
and may have tax consequences. In addition, if your state of
residence is not Kentucky, the dividends from the Fund may not be
exempt from income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Fund. The Fund and the Distributor reserve the
right to reject any order for the purchase of shares. In
addition, the offering of shares may be suspended at any time and
resumed at any time thereafter.
How to Purchase Class Y Shares
Institutional Class Shares ("Class Y Shares") are offered
only to institutional investors for investments held in a
fiduciary, advisory, agency, custodial or similar capacity, or
through them to their clients, and are not offered directly to
retail customers. Class Y Shares are offered at net asset value
with no sales charge, no redemption fee, no contingent deferred
sales charge and no distribution fee.
Class Y Shares of the Fund may be purchased through any
investment broker or dealer (a "selected dealer") which has a
sales agreement with Aquila Distributors, Inc. (the
"Distributor") or through the Distributor. There are two ways to
make an initial investment: (i) order the shares through your
investment broker or dealer, if it is a selected dealer; or (ii)
mail the Application with payment to the Fund's Shareholder
Servicing Agent (the "Agent") at the address on the Application.
There is no sales charge on initial or subsequent investments.
You are urged to complete an Application and send it to the Agent
so that expedited shareholder services can be established at the
time of your investment.
The minimum initial investment for Class Y Shares is
$100,000 for fiduciaries and $250,000 for all other eligible
purchasers, except that this limitation does not apply to
shareholders with accounts open on April 30, 1998, or as
otherwise stated in the Prospectus or Additional Statement. Such
investment must be drawn in United States dollars on a United
States commercial or savings bank or credit union or a United
States branch of a foreign commercial bank (each of which is a
"Financial Institution"). You may make subsequent investments in
Class Y Shares in any amount (unless you have an Automatic
Withdrawal Plan). Your subsequent investment may be made through
a selected dealer or by forwarding payment to the Agent, with the
name(s) of account owner(s), the account number and the name of
the Fund. With subsequent investments, please send the
pre-printed stub attached to the Fund's confirmations.
Subsequent investments of $50 or more in Class Y Shares can
be made by electronic funds transfer from your demand account at
a Financial Institution. To use electronic funds transfer for
your purchases, your Financial Institution must be a member of
the Automated Clearing House and the Agent must have received
your completed Application designating this feature, or, after
your account has been opened, a Ready Access Features form
available from the Distributor or the Agent. A pre-determined
amount can be regularly transferred for investment ("Automatic
Investment"), or single investments can be made upon receipt by
the Agent of telephone instructions from anyone ("Telephone
Investment"). The maximum amount of each Telephone Investment is
$50,000. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate these investment methods at any time or
charge a service fee, although no such fee is currently
contemplated.
How to Purchase Class I Shares
Initial and subsequent investments in Class I Shares must
be made through financial intermediaries and cannot be made
directly. Financial intermediaries may set minimum amounts for
initial purchase and subsequent investments in Class I Shares and
may charge a fee for effecting a purchase or other transaction on
behalf of customers. Financial intermediaries that make Class I
Shares of the Fund and other mutual funds available to their
customers may offer distinct services, may have their own charges
for services and may impose their own minimum requirements for
initial and subsequent investments. Customers of financial
intermediaries should read the Prospectus in light of the terms
of their accounts with financial intermediaries. Financial
intermediaries that have entered into specific agreements with
the Fund may enter confirmed purchase orders on behalf of clients
and customers, with payment to follow not later than the Fund's
pricing of Class I Shares on the following business day. If
payment is not received by that time the financial intermediary
could be held liable for resulting fees or losses.
Offering Price
The offering price for Class Y Shares is the net asset
value per share. The offering price determined on any day applies
to all purchase orders received by the Agent from selected
dealers that day, except that orders received by it after 4:00
p.m. New York time will receive that day's offering price only if
such orders were received by selected dealers from customers
prior to such time and transmitted to the Distributor prior to
its close of business that day (normally 5:00 p.m. New York
time); if not so transmitted, such orders will be filled at the
next determined offering price. Selected dealers are required to
transmit orders promptly. Investments by mail are made at the
offering price next determined after receipt of the purchase
order by the Agent. Purchase orders received on other than a
business day will be executed on the next succeeding business
day. Purchases by Automatic Investment and Telephone Investment
will be executed on the first business day occurring on or after
the date an order is considered received by the Agent at the
price determined on that day. In the case of Automatic Investment
your order will be executed on the date you specified for
investment at the price determined on that day, except that if
that day is not a business day your order will be executed at the
price determined on the next business day. In the case of
Telephone Investment your order will be filled at the next
determined offering price. If your order is placed after the time
for determining the net asset value of the Fund shares for any
day, it will be executed at the price determined on the following
business day. The sale of shares will be suspended during any
period when the determination of net asset value is
suspended.
The offering price for Class I Shares is the net asset
value per share. The offering price determined on any day applies
to all purchases received by each financial intermediary prior to
4:00 p.m. New York time on any business day. Purchase orders
received by financial intermediaries after that time will be
filled at the next determined offering price.
Possible Compensation for Dealers
The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
any class of shares of the Fund. Additional compensation may
include payment or partial payment for advertising of the Fund's
shares, payment of travel expenses, including lodging, incurred
in connection with attendance at sales seminars taken by
qualifying registered representatives to locations within or
outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences. In some instances, such compensation may be made
available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. The cost to the
Distributor of such promotional activities and such payments to
participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund
effected through such participating dealers, whether retained by
the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.
Brokers and dealers may receive different levels of
compensation for selling different classes of shares.
Confirmations and Share Certificates
All purchases of Class Y Shares will be confirmed and
credited to you in an account maintained for you at the Agent in
full and fractional shares of the Fund (rounded to the nearest
1/1000th of a share). Purchases of Class I Shares will be
confirmed by financial intermediaries. No share certificates will
be issued for Class Y Shares or Class I Shares.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended
to result in the sale of its shares except pursuant to a written
plan adopted under the Rule. No payments under the Plan from
assets represented by Class Y Shares are authorized.
Under a part of the Plan, the Fund is authorized to make
payments with respect to Class I Shares ("Class I Permitted
Payments") to Qualified Recipients. Class I Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Plan are not accruable or
for any fiscal year which is not a full fiscal year), at a rate
set from time to time by the Board of Trustees (currently 0.10 of
1%) but not more than 0.25 of 1% of the average annual net assets
represented by the Class I Shares of the Fund. Such payments
shall be made only out of the Fund's assets allocable to the
Class I Shares. "Qualified Recipients" means financial
intermediaries selected by the Distributor with which the Fund or
the Distributor has entered into written agreements to act in
such capacity.
The Plan contains provisions designed to protect against
any claim against or involving the Fund that some of the expenses
which might be considered to be sales-related which the Fund pays
or may pay come within the purview of the Rule. The Fund believes
that except for payments made with respect to Class A Shares,
Class C Shares and Class I Shares, it is not financing any such
activity and does not consider any payment enumerated in such
provisions as so financing any such activity. If and to the
extent that any payment as specifically listed in the Plan (see
the Additional Statement) is considered to be primarily intended
to result in or as indirect financing of any activity which is
primarily intended to result in the sale of Fund shares, these
payments are authorized under the Plan. In addition, if the
Administrator, out of its own funds, makes payment for
distribution expenses such payments are authorized. (See the
Additional Statement.)
Shareholder Services Plan for Class I Shares
Under a Shareholder Services Plan, (the "Plan") the Fund
is authorized to make payments with respect to Class I Shares
("Service Payments") to Qualified Recipients. Fees paid under the
Plan are subject to such limits as may be necessary for Class I
Shares to qualify as a "no-load" class for purposes of the
Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"). The current limitation is as follows: fees paid
under the Plan that satisfy the definition of "service fees" in
Rule 2830(d) of the Conduct Rules of the National Association of
Securities Dealers, Inc. may not exceed an amount equal to the
difference between (i) 0.25 of 1% of the average annual net
assets of the Fund represented by Class I Shares and (ii) the
amount paid under the Fund's Distribution Plan with respect to
the assets represented by the Class I Shares. That is, the total
payments under both plans will not exceed 0.25 of 1% of such net
assets. Where necessary or appropriate, the Independent Trustees,
or such appropriate officer or officers of the Fund as they may
designate, shall, with the advice of counsel, determine what fees
paid under this Plan are to be deemed "service fees." The Fund's
management believes that, in general, fees allocable to
activities such as sub-accounting and record-keeping are not
"service fees," while fees allocable to activities such as
account service are "service fees." In like manner, allocation of
payments among activities is also determined by the Independent
Trustees or their delegates. Subject to the foregoing, Service
Payments may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Plan are not accruable or for any fiscal year
which is not a full fiscal year), 0.25 of 1% of the average
annual net assets represented by the Class I Shares of the Fund.
Such payments shall be made only out of the Fund's assets
represented by the Class I Shares.
"Qualified Recipients" means broker-dealers or others
selected by the Distributor, including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements to provide
personal services to Class I Shares shareholders, maintenance of
Class I Shares shareholder accounts and/or pursuant to specific
agreements entering of confirmed purchase orders on behalf of
customers or clients and which have provided services to holders
of Class I Shares and/or maintenance of Class I Shares
shareholder accounts.
The Distributor is authorized, but not directed, to take
into account, in addition to any other factors deemed relevant by
it, the following: (a) the amount of the Qualified Holdings of
the Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Class I Shares,
including without limitation, (i) activities relating to
sub-accounting and record-keeping, including the providing of
necessary personnel and facilities to establish and maintain
shareholder accounts and records, and (ii) activities relating to
account service, such as assisting shareholders in designating
and changing dividend options, account designations and
addresses; answering customer inquiries regarding account status
and history and the manner in which purchases and redemptions of
shares of the Fund may be effected; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares, including, where appropriate, arranging for the wiring of
funds; assisting in processing purchase and redemption
transactions; and verifying and guaranteeing shareholder
signatures in connection with redemption orders and transfers and
changes in shareholder designated accounts. A majority of the
Independent Trustees (as defined in the Plan) may remove any
person as a Qualified Recipient and no fees shall be paid
pursuant to the Plan for activities primarily intended to result
in the sale of shares of the Fund or to finance sales or sales
promotion expenses. No fees shall be paid, or be deemed to have
been paid, for any of the listed activities to the extent that
such payments are deemed by the Independent Trustees to be
intended for distribution. Service Payments shall be paid through
the Distributor or shareholder servicing agent as disbursing
agent. (See the Additional Statement.)
HOW TO REDEEM YOUR INVESTMENT
Redemption of Class Y Shares
You may redeem all or any part of your Class Y Shares at the
net asset value next determined after acceptance of your
redemption request at the Agent. Redemptions can be made by the
various methods described below. There is no minimum period for
any investment in the Fund, except for shares recently purchased
by check, Automatic Investment or Telephone Investment as
discussed below. There are no redemption fees or penalties on
redemption of Class Y Shares. A redemption may result in a
transaction taxable to you.
For your convenience the Fund offers expedited redemption
for Class Y Shares to provide you with a high level of liquidity
for your investment.
Expedited Redemption Methods
You have the flexibility of two expedited methods of
initiating redemptions of Class Y Shares.
1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make
payments
a) to a Financial Institution account you have
predesignated or
b) by check in the amount of $50,000 or less, mailed to
you, if your shares are registered in your name at the
Fund and the check is sent to your address of record,
provided that there has not been a change of your
address of record during the 30 days preceding your
redemption request. You can make only one request for
telephone redemption by check in any 7-day period.
See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.
To redeem an investment by this method, telephone:
800-872-5860 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
2. By FAX or Mail. You may also request redemption
payments to a predesignated Financial Institution
account by a letter of instruction sent to: PFPC Inc.,
by FAX at 302-791-1777 or by mail to 400 Bellevue
Parkway, Wilmington, DE 19809. The letter must provide
account name(s), account number, amount to be redeemed,
and any payment directions and be signed by the
registered holder(s). Signature guarantees are not
required. See "Redemption Payments", below for payment
methods.
If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access
Features form and provide the required information concerning
your Financial Institution account number. The Financial
Institution account must be in the exclusive name(s) of the
shareholder(s) as registered with the Fund. You may change the
designated Financial Institution account at any time by
completing and returning a Ready Access Features form. For
protection of your assets, this form requires signature
guarantees and possible additional documentation.
Regular Redemption Method
If you own Class Y Shares and have not elected Expedited
Redemption to a predesignated Financial Institution account, you
must use the Regular Redemption Method. Under this redemption
method you should send a letter of instruction to the Fund's
Shareholder Servicing Agent: PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809. The letter must contain:
Account Name(s);
Account Number;
Dollar amount or number of shares to be redeemed
or a statement that all shares held in the account
are to be redeemed;
Payment instructions (normally redemption proceeds
will be mailed to your address as registered with
the Fund);
Signature(s) of the registered shareholder(s); and
Signature guarantee(s), if required, as indicated
below.
For your redemption request to be in "proper form," the
signature or signatures must be the same as in the registration
of the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required
if sufficient documentation is not on file with the Agent.
Additional documentation may be required where shares are held by
certain types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by other
than the shareholder of record. If redemption proceeds of $50,000
or less are payable to the record holder and are to be sent to
the record address, no signature guarantee is required, except as
noted above. In all other cases, signatures must be guaranteed by
a member of a national securities exchange, a U.S. bank or trust
company, a state-chartered savings bank, a federally chartered
savings and loan association, a foreign bank having a U.S.
correspondent bank, a participant in the Securities Transfer
Association Medallion Program (STAMP), the Stock Exchanges
Medallion Program (SEMP) or the New York Stock Exchange, Inc.
Medallion Signature Program (MSP). A notary public is not an
acceptable signature guarantor.
Redemption of Class I Shares
You may redeem all or any part of your Class I Shares at
the net asset value next determined after acceptance of your
redemption request by your financial intermediary. Redemption
requests for Class I Shares must be made through a financial
intermediary and cannot to be made directly. Financial
intermediaries may charge a fee for effecting redemptions. There
is no minimum period for any investment in the Fund. The Fund
does not impose redemption fees or penalties on redemption of
Class I Shares. A redemption may result in a transaction taxable
to you.
Redemption Payments
Redemption payments with respect to Class Y Shares will
ordinarily be mailed to you at your address of record. If you so
request and the amount of your redemption proceeds is $1,000 or
more, the proceeds will, wherever possible, be wired or
transferred through the facilities of the Automated Clearing
House to the Financial Institution account specified in the
Expedited Redemption section of your Application or Ready Access
Features form. The Fund may impose a charge, not exceeding $5.00
per wire redemption, after written notice to shareholders who
have elected this redemption procedure. The Fund has no present
intention of making this charge. Upon 30 days' written notice to
shareholders, the Fund may modify or terminate the use of the
Automated Clearing House to make redemption payments at any time
or charge a service fee, although no such fee is presently
contemplated. If any such changes are made, the Prospectus will
be supplemented to reflect them. If you use a broker or dealer to
arrange for a redemption, it may charge you a fee for this
service. Redemption payments for Class I Shares are made to
financial intermediaries.
The Fund will normally make payment for all shares
redeemed on the next business day (see "Net Asset Value Per
Share") following acceptance of the redemption request made in
compliance with one of the redemption methods specified above.
Except as set forth below, in no event will payment be made more
than seven days after acceptance of such a redemption request.
However, the right of redemption may be suspended or the date of
payment postponed (i) during periods when the New York Stock
Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the
Securities and Exchange Commission by rule or regulation; (ii)
during periods in which an emergency, as determined by the
Securities and Exchange Commission, exists which causes disposal
of, or determination of the net asset value of, the portfolio
securities to be unreasonable or impracticable; or (iii) for such
other periods as the Securities and Exchange Commission may
permit. Payment for redemption of shares recently purchased by
check (irrespective of whether the check is a regular check or a
certified, cashier's or official bank check) or by Automatic
Investment or Telephone Investment may be delayed up to 15 days
or until (i) the purchase check or Automatic Investment or
Telephone Investment has been honored or (ii) the Agent has
received assurances by telephone or in writing from the Financial
Institution on which the purchase check was drawn, or from which
the funds for Automatic Investment or Telephone Investment were
transferred, satisfactory to the Agent and the Fund, that the
purchase check or Automatic Investment or Telephone Investment
will be honored. Possible delays in payment of redemption
proceeds for Class Y Shares can be eliminated by using wire
payments or Federal Reserve drafts to pay for purchases.
If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by the distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. (See the Additional Statement for details.)
The Fund has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions
or failure to meet the minimum investment level under an
Automatic Purchase Program. If the Board elects to do this,
shareholders who are affected will receive prior written notice
and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.
AUTOMATIC WITHDRAWAL PLAN
If you had a Class Y Shares account with the Fund before
April 30, 1998, you may establish an Automatic Withdrawal Plan if
you own or purchase Class Y Shares of the Fund having a net asset
value of at least $5,000. Under an Automatic Withdrawal Plan you
will receive a monthly or quarterly check in a stated amount, not
less than $50. If such a plan is established, all dividends and
distributions must be reinvested in your shareholder account.
Redemption of shares to make payments under the Automatic
Withdrawal Plan will give rise to a gain or loss for tax
purposes. (See the Automatic Withdrawal Plan provisions of the
Application included in the Prospectus, the Additional Statement
under "Automatic Withdrawal Plan," and "Dividend and Tax
Information" below.) The Automatic Withdrawal Plan is not
available to other investors.
MANAGEMENT ARRANGEMENTS
The Board of Trustees
The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.
Change in Management Arrangements
On April 24, 1998, the management arrangements described
below were approved by the Fund's shareholders and will go into
effect on May 1, 1998. The new arrangements are designed to
change the form of the Fund's investment advisory and
administration arrangements to a new structure involving an
adviser and a sub-adviser. The new arrangements do not result in
any change in overall management fees paid by the Fund, nor any
change in the parties providing these services. Marketing efforts
and positioning of the Fund will remain the same with a strong
local niche orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which since inception of the Fund has served as the
Fund's administrator, in addition became investment adviser under
a new agreement (the "Advisory and Administration Agreement")
under which it also continues to provide the Fund with all
administrative services. Also, by adoption of a Sub-Advisory
Agreement between Aquila and Banc One investment Advisors
Corporation ("the Sub-Adviser"), the former investment advisory
agreement is replaced by one under which Aquila appoints the
Sub-Adviser as Sub-Adviser to the Fund. Under the Sub-Advisory
Agreement, the Sub-Adviser will continue to provide the Fund with
advisory services of the kind which it formerly provided as
adviser. The duties of the administrator, previously performed
under an administration agreement, are now performed by Aquila
under the Advisory and Administration Agreement where Aquila is
referred to as the "Manager." The former administration agreement
terminates upon effectiveness of the new agreements.
The Advisory and Administration Agreement
The Advisory and Administration Agreement between the
Fund and Aquila Management Corporation (the "Manager") has
several parts, most of which are substantially identical to
corresponding provisions in the Fund's former advisory agreements
and administration agreement. The Advisory and Administration
Agreement contains provisions relating to investment advice for
the Fund and management of its portfolio that are substantially
identical to prior advisory agreements, except that the Manager
has the power to delegate its advisory functions to a
sub-adviser, which it will employ at its own expense. It has
delegated these duties to the Sub-Adviser. The Advisory and
Administration Agreement contains provisions relating to
administrative services that are substantially identical to those
contained in the Fund's former administration agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold
by the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund; and
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund.
The Advisory and Administration Agreement provides that,
subject to the termination provisions described below, the
Manager may at its own expense delegate to a qualified
organization ("Sub-Adviser"), affiliated or not affiliated with
the Manager, any or all of the above duties. Any such delegation
of the duties set forth in (i), (ii) or (iii) above shall be by a
written agreement (the "Sub-Advisory Agreement") approved as
provided in Section 15 of the Investment Company Act of 1940. The
Manager delegates all of such functions to the Sub-Adviser in the
Sub-Advisory Agreement, which becomes effective at the same time
as the Advisory and Administration Agreement.
The Advisory and Administration Agreement provides that
subject to the direction and control of the Board of Trustees of
the Fund, the Manager shall provide all administrative services
to the Fund other than those relating to its investment portfolio
which have been delegated to a Sub-Adviser of the Fund under the
Sub-Advisory Agreement; as part of such administrative duties,
the Manager shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following functions and
for the maintenance of the headquarters of the Fund;
(ii) oversee all relationships between the Fund and any
sub-adviser, transfer agent, custodian, legal counsel,
auditors and principal underwriter, including the
negotiation of agreements in relation thereto, the
supervision and coordination of the performance of such
agreements, and the overseeing of all administrative matters
which are necessary or desirable for the effective operation
of the Fund and for the sale, servicing or redemption of the
Fund's shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share and
the dividends (provided that if there is a Sub-Adviser,
daily pricing of the Fund's portfolio shall be the
responsibility of the Sub-Adviser under the Sub-Advisory
Agreement) or, at its expense and responsibility, delegate
such duties in whole or in part to a company satisfactory to
the Fund;
(iv) maintain the Fund's books and records, and prepare
(or assist counsel and auditors in the preparation of) all
required proxy statements, reports to the Fund's
shareholders and Trustees, reports to and other filings with
the Securities and Exchange Commission and any other
governmental agencies, and tax returns, and oversee the
insurance relationships of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be necessary
to register or maintain the registration of the Fund and/or
its shares under the securities or "Blue-Sky" laws of all
such jurisdictions as may be required from time to time;
(vi) respond to any inquiries or other communications of
shareholders of the Fund and broker-dealers, or if any
such inquiry or communication is more properly to be
responded to by the Fund's shareholder servicing and
transfer agent or distributor, oversee such shareholder
servicing and transfer agent's or distributor's response
thereto.
The Advisory and Administration Agreement contains
provisions relating to compliance of the investment program,
responsibility of the Manager for any investment program managed
by it, allocation of brokerage, and responsibility for errors
that are substantially the same as the corresponding provisions
in the Sub-Advisory Agreement. (See the Additional
Statement.)
The Advisory and Administration Agreement provides that
the Manager shall, at its own expense, pay all compensation of
Trustees, officers, and employees of the Fund who are affiliated
persons of the Manager.
The Fund bears the costs of preparing and setting in type
its prospectuses, statements of additional information and
reports to its shareholders, and the costs of printing or
otherwise producing and distributing those copies of such
prospectuses, statements of additional information and reports as
are sent to its shareholders. All costs and expenses not
expressly assumed by the Manager under the agreement or otherwise
by the Manager, administrator or principal underwriter or by any
Sub-Adviser shall be paid by the Fund, including, but not limited
to (i) interest and taxes; (ii) brokerage commissions; (iii)
insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Manager or such
sub-adviser, administrator or principal underwriter; (v) legal
and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses
incident to the issuance of its shares (including issuance on
the payment of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or State
securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy
material to shareholders of the Fund; (x) all other expenses
incidental to holding meetings of the Fund's shareholders; and
(xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which
the Fund may have to indemnify its officers and Trustees.
Under the Advisory and Administration Agreement, the Fund
will pay to the Manager a fee payable monthly and computed on the
net asset value of the Fund as of the close of business each
business day at the annual rate of 0.50 of 1% of such net asset
value, provided, however, that for any day that the Fund pays or
accrues a fee under the Distribution Plan of the Fund based upon
the assets of the Fund, the annual management fee shall be
payable at the annual rate of 0.40 of 1% of such net asset
value.
The Advisory and Administration Agreement provides that
it may be terminated by the Manager at any time without penalty
upon giving the Fund sixty days' written notice (which notice may
be waived by the Fund) and may be terminated by the Fund at any
time without penalty upon giving the Manager sixty days' written
notice (which notice may be waived by the Manager), provided that
such termination by the Fund shall be directed or approved by a
vote of a majority of its Trustees in office at the time or by a
vote of the holders of a majority (as defined in the 1940 Act) of
the voting securities of the Fund outstanding and entitled to
vote. The specific portions of the Advisory and Administration
Agreement which relate to providing investment advisory services
will automatically terminate in the event of the assignment (as
defined in the 1940 Act) of the Advisory and Administration
Agreement, but all other provisions relating to providing
services other than investment advisory services will not
terminate, provided however, that upon such an assignment the
annual fee payable monthly and computed on the net asset value of
the Fund as of the close of business each business day shall be
reduced to the annual rate of 0.26 of 1% of such net asset
value.
The Sub-Advisory Agreement
The services of the Sub-Adviser are rendered under the
Sub-Advisory Agreement between the Manager and the Sub-Adviser,
which provides, subject to the control of the Board of Trustees,
for investment supervision and at the Sub-Adviser's expense for
pricing of the Fund's portfolio daily using a pricing service or
other source of pricing information satisfactory to the Fund and,
unless otherwise directed by the Board of Trustees, for pricing
of the Fund's portfolio at least quarterly using another such
source satisfactory to the Fund. The Sub-Advisory Agreement
states that the Sub-Adviser shall, at its expense, provide to the
Fund all office space and facilities, equipment and clerical
personnel necessary for the carrying out of the Sub-Adviser's
duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement provides that the Manager
agrees to pay the Sub-Adviser, and the Sub-Adviser agrees to
accept as full compensation for all services rendered by the
Sub-Adviser as such, a management fee payable monthly and
computed on the net asset value of the Fund as of the close of
business each business day at the annual rate of 0.17 of 1% of
such net asset value, provided, however, that for any day that
the Fund pays or accrues a fee under the Distribution Plan of the
Fund based upon the assets of the Fund (other than a fee
allocable by class to certain shares of the Fund) the annual
management fee shall be payable at the annual rate of 0.14 of 1%
of such net asset value.
The Sub-Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund; (see the
Additional Statement). Under these provisions, the Sub-Adviser is
authorized to consider sales of shares of the Fund or of any
other investment company or companies having the same investment
adviser, sub-adviser, administrator or principal underwriter as
the Fund. It has termination and renewal provisions similar to
those contained in the Advisory and Administration Agreement.
(See the Additional Statement.)
Information about the Manager, the Sub-Adviser and the
Distributor
Banc One Investment Advisors Corporation (the "Sub-
Adviser") is a wholly-owned subsidiary of BANC ONE CORPORATION
("Banc One"). Banc One currently has affiliate banking
organizations in Kentucky, Arizona, Colorado, Illinois, Indiana,
Louisiana, Ohio, Oklahoma, Texas, Utah, West Virginia and
Wisconsin. On a consolidated basis, Banc One had assets of
approximately $115.9 billion as of December 31, 1997. As of July
1, 1997 the Sub-Adviser was responsible for management of over
$15 billion in municipal obligations, of which, $3.0 billion were
held in mutual funds and of which $343.1 million were obligations
of Kentucky issuers. The Sub-Adviser services Kentucky clients at
offices in Louisville and Lexington. As it has been in the past,
since the beginning of the Fund's operations in 1987, the Fund's
investments will continue to be managed so that it will have a
portfolio of quality-oriented (investment grade) securities.
The Fund's portfolio is managed locally in Kentucky by
Mr. Thomas S. Albright, Vice President and Senior Portfolio
Manager, at the Sub-Adviser's Louisville office. He has served in
this capacity since September, 1995, when the Sub-Adviser became
adviser to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank, the Sub-Adviser's local predecessor, where he was
responsible for management of its investment portfolio. He also
served as President of Liberty Investment Services, Inc., that
bank's full service brokerage subsidiary. Mr. Albright is a
member of the Sub-Adviser's Fixed Income Fund Sub-Committee. Mr.
Albright attended the University of Louisville.
See the Additional Statement as to the legality, under
the Glass-Steagall Act, of the Sub-Adviser's acting as the Fund's
investment adviser. In general, under that Act, the Sub-Adviser
will not, among other things, be involved in the promotion or
distribution of shares of the Fund.
The Fund's Manager is founder and Manager and/or
administrator to the Aquilasm Group of Funds, which consists of
tax-free municipal bond funds, money market funds and two equity
funds. As of December 31, 1997, these funds had aggregate assets
of approximately $2.8 billion, of which approximately $1.9
billion consisted of assets of the tax-free municipal bond funds.
The Manager, which was founded in 1984, is controlled by Mr. Lacy
B. Herrmann (directly, through a trust and through share
ownership by his wife). (See the Additional Statement for
information on Mr. Herrmann.)
The Distributor currently handles the distribution of the
shares of fourteen funds (five money market funds, seven tax-free
municipal bond funds and two equity funds), including the Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs
relating to prospectuses and reports as well as the costs of
supplemental sales literature, advertising and other promotional
activities.
At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which
are currently owned 75% by Mr. Herrmann and 25% by Diana P.
Herrmann, will be owned by certain directors and/or officers of
the Manager and/or the Distributor, including Mr. Herrmann and
Ms. Herrmann.
During the fiscal year ended December 31, 1997, the Fund
paid or accrued $322,582 and $599,081 to the Sub-Adviser and the
Manager, respectively, under the former advisory and
administration agreements then in effect.
DIVIDEND AND TAX INFORMATION
Dividends and Distributions
The Fund will declare all of its net income, as defined
below, as dividends on every day, including weekends and
holidays, on those shares outstanding for which payment was
received by the close of business on the preceding business day.
Net income for dividend purposes includes all interest income
accrued by the Fund since the previous dividend declaration,
including accretion of any original issue discount, less expenses
paid or accrued. As such net income will vary, the Fund's
dividends will also vary. Dividends and other distributions paid
by the Fund with respect to each class of its shares are
calculated at the same time and in the same manner. In addition,
the dividends of each class can vary because each class will bear
certain class-specific charges.
It is the Fund's present policy to pay dividends so that
they will be received or credited by approximately the first day
of each month. On the Application or by completing a Ready Access
Features form, holders of Class Y Shares may elect to have
dividends deposited without charge by electronic funds transfers
into an account at a Financial Institution if it is a member of
the Automated Clearing House. All arrangements for the payment of
dividends with respect to Class I Shares, including reinvestment
of dividends, must be made through financial intermediaries.
Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid
by the Agent to a selected dealer; or (ii) the third day on which
the New York Stock Exchange is open after the day on which the
net asset value of the redeemed shares has been determined. (See
"How To Redeem Your Investment.")
Net investment income includes amounts of income from the
Kentucky Obligations in the Fund's portfolio which are allocated
as "exempt-interest dividends." "Exempt-interest dividends" are
exempt from regular Federal income tax. The allocation of
"exempt-interest dividends" will be made by the use of one
designated percentage applied uniformly to all income dividends
declared during the Fund's tax year. Such designation will
normally be made in the first month after the end of each of the
Fund's fiscal years as to income dividends paid in the prior
year. It is possible that in certain circumstances, a small
portion of the dividends paid by the Fund will be subject to
income taxes. During the Fund's fiscal year ended December 31,
1997, 97.2% of the Fund's dividends were "exempt-interest
dividends." For the calendar year 1997, 2.8% of the total
dividends paid were taxable. The percentage of income designated
as tax-exempt for any particular dividend may be different from
the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.
Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be
paid out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of your
redemptions of Class Y Shares, and from short- and long-term
gains distributions (if any) and any other distributions with
respect to you Class Y Shares that do not qualify as
"exempt-interest dividends," if you do not comply with provisions
of the law relating to the furnishing of taxpayer identification
numbers and reporting of dividends.
Unless you request otherwise by letter addressed to the
Agent or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be
automatically reinvested in full and fractional Class Y Shares of
the Fund at net asset value on the record date for the dividend
or distribution or other date fixed by the Board of Trustees. An
election to receive cash will continue in effect until written
notification of a change is received by the Agent. All Class Y
Shares shareholders, whether their dividends are received in cash
or are being reinvested, will receive a monthly account summary
indicating the current status of their investment. There is no
fixed dividend rate. Corporate shareholders of the Fund are not
entitled to any deduction for dividends received from the
Fund.
Tax Information
The Fund qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as
dividends and distributions. However, the Code contains a number
of complex tests relating to such qualification and it is
possible although not likely that the Fund might not meet one or
more of these tests in any particular year. If it does not so
qualify, it would be treated for tax purposes as an ordinary
corporation, would receive no tax deduction for payments made to
shareholders and would be unable to pay dividends or
distributions which would qualify as "exempt-interest dividends"
or "capital gains dividends," as discussed below.
The Fund intends to qualify during each fiscal year under
the Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income
earned by the Fund on Kentucky Obligations will be excludable
from gross income of the shareholders for regular Federal income
tax purposes. Capital gains dividends are not included in
exempt-interest dividends. Although "exempt-interest dividends"
are not taxed, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the
Fund) received or acquired during the year.
The Code requires that either gains realized by the Fund
on the sale of municipal obligations acquired after April 30,
1993 at a price which is less than face or redemption value be
included as ordinary income to the extent such gains do not
exceed such discount or that the discount be amortized and
included ratably in taxable income. There is an exception to the
foregoing treatment if the amount of the discount is less than
0.25% of face or redemption value multiplied by the number of
years from acquisition to maturity. The Fund will report such
ordinary income in the years of sale or redemption rather than
amortize the discount and report it ratably. To the extent the
resultant ordinary taxable income is distributed to shareholders,
it will be taxable to them as ordinary income.
Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates)
are reportable by shareholders as gain from the sale or exchange
of a capital asset held for more than one year. This is the case
whether the shareholder takes the distribution in cash or elects
to have the distribution reinvested in Fund shares and regardless
of the length of time the shareholder has held his or her
shares.
Short-term gains, when distributed, are taxed to
shareholders as ordinary income. Capital losses of the Fund are
not distributed but carried forward by the Fund to offset gains
in later years and thereby lessen the later-year capital gains
dividends and amounts taxed to shareholders.
The Fund's gains or losses on sales of Kentucky Obligations
will be long-term or short-term depending upon the length of time
the Fund has held such obligations. Capital gains and losses of
the Fund will also include gains and losses on Futures and
options, if any, including gains and losses actually realized on
sales and exchanges and gains and losses deemed to be realized.
Those deemed to be realized are on Futures and options held by
the Fund at year-end, which are "marked to the market," that is,
deemed sold for fair market value. Net gains or losses realized
and deemed realized on Futures and options will be reportable by
the Fund as long-term to the extent of 60% of the gains or losses
and short-term to the extent of 40% regardless of the actual
holding period of such investments.
Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.
Under the Code, interest on loans incurred by shareholders
to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under
rules used by the Internal Revenue Service for determining when
borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund
may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the
purchase of shares. The receipt of exempt-interest dividends
from the Fund by an individual shareholder may result in some
portion of any social security payments or railroad retirement
benefits received by the shareholder or the shareholder's spouse
being included in taxable income.
Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
or private activity bonds should consult their own tax advisers
before purchasing shares.
While interest from all Kentucky Obligations is tax-exempt
for purposes of computing the shareholder's regular tax, interest
from so-called private activity bonds issued after August 7,
1986, constitutes a tax preference for both individuals and
corporations and thus will enter into a computation of the
alternative minimum tax. Whether or not that computation will
result in a tax will depend on the entire content of the
taxpayer's return. The Fund will not invest in the types of
Kentucky Obligations which would give rise to interest that would
be subject to alternative minimum taxation if more than 20% of
its net assets would be so invested, and may refrain from
investing in that type of bond completely. The 20% limit is a
fundamental policy of the Fund.
Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current
earnings, this adjustment will tend to make it more likely that
corporate shareholders will be subject to the alternative minimum
tax.
Tax Effects of Redemptions
Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid
for the shares. If you are required to pay a contingent deferred
sales charge at the time of redemption, the amount of that charge
will reduce the amount of your gain or increase the amount of
your loss as the case may be. Your gain or loss will be long-term
if you held the redeemed shares for over 18 months, mid-term if
you held the redeemed shares for over one year but not more than
18 months and short-term, if for a year or less. Long term
capital gains are currently taxed at a maximum rate of 20%,
mid-term capital gains are currently taxed at a maximum rate of
28%, and short-term gains are currently taxed at ordinary income
tax rates. However, if shares held for six months or less are
redeemed and you have a loss, two special rules apply: the loss
is reduced by the amount of exempt-interest dividends, if any,
which you received on the redeemed shares, and any loss over and
above the amount of such exempt-interest dividends is treated as
a long-term loss to the extent you have received capital gains
dividends on the redeemed shares.
Kentucky Tax Information
Since the Fund may, except as indicated below, purchase only
Kentucky Obligations (which, as defined, means obligations,
including those of non-Kentucky issuers, of any maturity which
pay interest which, in the opinion of counsel, is exempt from
regular Federal income taxes and Kentucky income taxes) all of
the exempt-interest dividends paid by the Fund will be excludable
from the shareholder's gross income for Kentucky income tax
purposes. The Fund may also pay "short-term gains distributions"
and "long-term gains distributions," each as discussed under
"Dividends and Distributions" above. Under Kentucky income tax
law, short-term gains distributions are not exempt from Kentucky
income tax. Kentucky taxes long-term gains distributions at its
ordinary individual and corporate rates. The only investment
which the Fund may make other than in Kentucky Obligations is in
Futures and options on them. Any gains on Futures and options
(including gains imputed under the Code) paid as part or all of a
short-term gains distribution or a long-term gains distribution
will be taxed as indicated above. Under the laws of Kentucky
relating to ad valorem taxation of property, the shareholders
rather than the Fund are considered the owners of the Fund's
assets. Each shareholder will be deemed to be the owner of a
pro-rata portion of the Fund. According to the Kentucky Revenue
Cabinet, to the extent that such portion consists of Kentucky
Obligations, it will be exempt from property taxes, but it will
be subject to property taxes on intangibles to the extent it
consists of cash on hand, Futures, options and other nonexempt
assets.
EXCHANGE PRIVILEGE
There is an exchange privilege as set forth below among
this Fund and certain tax-free municipal bond funds and two
equity funds (together with this Fund, the "Bond or Equity
Funds") and certain money market funds (the "Money-Market
Funds"), all of which are sponsored by Aquila Management
Corporation and Aquila Distributors, Inc., and have the same
Manager or Administrator and Distributor as the Fund. All
exchanges are subject to certain conditions described below. As
of the date of the Prospectus, the Aquila Bond or Equity Funds
are this Fund, Aquila Rocky Mountain Equity Fund, Aquila Cascadia
Equity Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona,
Tax-Free Trust of Oregon, Tax-Free Fund of Colorado, Tax-Free
Fund For Utah and Narragansett Insured Tax-Free Income Fund; the
Aquila Money-Market Funds are Capital Cash Management Trust,
Pacific Capital Cash Assets Trust (Original Shares), Pacific
Capital Tax-Free Cash Assets Trust (Original Shares), Pacific
Capital U.S. Government Securities Cash Assets Trust (Original
Shares) and Churchill Cash Reserves Trust.
Class Y Shares of the Fund may be exchanged only for
Class Y Shares of the Bond or Equity Funds or for shares of a
Money-Market Fund. Similar exchangability is available to Class I
Shares to the extent that other Aquila-sponsored funds are made
available to its customers by a financial intermediary. All
exchanges of Class I Shares must be made through your financial
intermediary.
Under the Class Y exchange privilege, once Class Y Shares
of any Bond or Equity Fund have been purchased, those shares (and
any Class Y Shares acquired as a result of reinvestment of
dividends and/or distributions) may be exchanged any number of
times between Money-Market Funds and Class Y Shares of the Bond
or Equity Funds without the payment of any sales charge, provided
that the applicable minimum investment requirements for purchase
of Class Y Shares are met. (See "How to Purchase Class Y
Shares.")
The "Class Y Eligible Shares" of any Bond or Equity Fund are
those shares which were (a) acquired by direct purchase including
by exchange by an institutional investor from a Money-Market
Fund, or which were received in exchange for Class Y Shares of
another Bond or Equity Fund; or (b) acquired as a result of
reinvestment of dividends and/or distributions on otherwise Class
Y Eligible Shares. Shares of a Money-Market Fund not acquired in
exchange for Class Y Eligible Shares of a Bond or Equity Fund can
be exchanged for Class Y Shares of a Bond or Equity Fund only by
persons eligible to make an initial purchase of Class Y Shares.
This Fund, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into
its shares, if shares of the fund into which exchange is desired
are not available for sale in your state of residence. The Fund
may also modify or terminate this exchange privilege at any time.
In the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take
effect on less than 60 days' written notice to shareholders.
All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset
value of the shares surrendered for exchange are at least equal
to the minimum investment requirements of the investment company
whose shares are being acquired and (iii) the ownership of the
accounts from which and to which the exchange is made are
identical.
The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone:
800-872-5860 toll free
Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.
Exchanges of Class Y Shares will be effected at the
relative net asset values of the Class Y Shares being exchanged
next determined after receipt by the Agent of your exchange
request. Exchanges of Class I Shares will be effected at the
relative net asset values of the Class I Shares being exchanged
next determined after receipt by the financial intermediary of
your exchange request.
An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period
(see "Tax Effects of Redemptions" and the Additional Statement);
no representation is made as to the deductibility of any such
loss should such occur.
Dividends paid by the Money-Market Funds are taxable,
except to the extent that a portion or all of the dividends paid
by Pacific Capital Tax-Free Cash Assets Trust (a tax-free
money-market Fund) are exempt from regular Federal income tax,
and to the extent that a portion or all of the dividends paid by
Pacific Capital U.S. Government Securities Cash Assets Trust
(which invests in U.S. Government obligations) are exempt from
state income taxes. Dividends paid by Aquila Rocky Mountain
Equity Fund and Aquila Cascadia Equity Fund are taxable. If your
state of residence is not the same as that of the issuers of
obligations in which a tax-free municipal bond fund or a tax-free
money-market fund invests, the dividends from that fund may be
subject to income tax of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of such a bond fund or a tax-free money-market fund under
the exchange privilege arrangement.
If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.
GENERAL INFORMATION
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate
and taxable equivalent distribution rate.
Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase,
invested at the maximum public offering price (offering price
includes any applicable sales charge) for 1-, 5- and 10-year
periods and for a period since the inception of the Fund, to the
extent applicable, through the end of such periods, assuming
reinvestment (without sales charge) of all distributions. The
Fund may also furnish total return quotations for other periods
or based on investments at various applicable sales charge levels
or at net asset value. For such purposes total return equals the
total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a
percentage of the purchase price. (See the Additional
Statement.)
Current yield reflects the income per share earned by
each of the Fund's portfolio investments; it is calculated by (i)
dividing the Fund's net investment income per share during a
recent 30-day period by (ii) the maximum public offering price on
the last day of that period and by (iii) annualizing the result.
Taxable equivalent yield shows the yield from a taxable
investment that would be required to produce an after-tax yield
equivalent to that of the Fund, which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of
the Fund's yield (calculated as indicated) by one minus a stated
income tax rate and by adding the product to the taxable portion
(if any) of the Fund's yield. (See the Additional Statement.)
Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities
and Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will
be paid to the Fund's shareholders. Dividends or distributions
paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted
to shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's distribution rate (calculated as
indicated above). The current distribution rate differs from the
current yield computation because it could include distributions
to shareholders from sources, if any, other than dividends and
interest, such as short-term capital gains or return of capital.
If distribution rates are quoted in advertising, they will be
accompanied by calculations of current yield in accordance with
the formula of the Securities and Exchange Commission.
In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum
sales charge, if any, on the purchase of shares, but not on
reinvestment of income dividends. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future
period. The annual report of the Fund contains additional
performance information that will be made available upon request
and without charge.
Description of the Fund and Its Shares
Churchill Tax-Free Trust (the "Trust"), was formed on
March 30, 1987, as a Massachusetts business trust. Its name was
changed from "Churchill Tax-Free Fund of Kentucky" to "Churchill
Tax-Free Trust" in June, 1988. The Fund is the original and only
active portfolio (series) of the Trust. The Fund is an open-end,
non-diversified management investment company. (See "Investment
of the Fund's Assets" for further information about the Fund's
status as "non-diversified.") The Declaration of Trust permits
the Trustees to issue an unlimited number of full and fractional
shares and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. Each share
represents an equal proportionate interest in the Fund with each
other share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance with
their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of
the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund's classes at that time. All shares are presently
divided into four classes; however, if they deem it advisable and
in the best interests of shareholders, the Board of Trustees of
the Fund may create additional classes of shares (subject to
rules and regulations of the Securities and Exchange Commission
or by exemptive order) or the Board of Trustees may, at its own
discretion, create additional series of shares, each of which may
have separate assets and liabilities (in which case any such
series will have a designation including the word "Series"). See
the Additional Statement for further information about possible
additional series. Shares are fully paid and non-assessable,
except as set forth under the caption "General Information" in
the Additional Statement; the holders of shares have no
pre-emptive or conversion rights, except that Class C Shares
automatically convert to Class A Shares after being held for six
years.
The other two classes of shares of the Fund are
Front-Payment Class Shares ("Class A Shares") and Level-Payment
Class Shares ("Class C Shares"), which are fully described in a
separate prospectus that can be obtained by calling the Fund at
800-872-5859.
The primary distinction among the Fund's four classes of
shares lies in their different sales charge structures and
ongoing expenses, which are likely to be reflected in differing
yields and other measures of investment performance. All four
classes represent interests in the same portfolio of Kentucky
Obligations and have the same rights, except that each class
bears the separate expenses, if any, of its participation in the
Distribution Plan and Shareholder Services Plan and has exclusive
voting rights with respect to such participation. There are no
Distribution fees with respect to Class Y Shares.
The Fund's Distribution Plan has four parts. In addition
to the provisions described above, Parts I and II of the Plan
authorize payments, to certain "Qualified Recipients," out of the
Fund assets allocable to the Class A Shares and Class C Shares,
respectively. (See the Additional Statement.) The Fund has also
adopted a Shareholder Services Plan under which the Fund is
authorized to make certain payments out of the Fund assets
allocable to the Class C Shares. (See the Additional
Statement.)
The Year 2000
Like other financial and business organizations, the Fund
could be adversely affected if computer systems the Fund relies
on do not properly process date-related information and data
involving the year 2000 and after. The Manager is taking steps
that it believes are reasonable to address this problem in its
own computer systems and to obtain assurances that comparable
steps are being taken by the other major service providers to the
Fund. The Manager has also requested the Fund's portfolio manager
to evaluate the potential impact of this problem on the issuers
of securities in which the Fund invests. At this time there can
be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund.
Voting Rights
At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders
will vote on the election of Trustees and on other matters
submitted to the vote of shareholders. Shares vote by classes on
any matter specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Fund, except that the Fund's Board of Trustees may
change the name of the Fund. The Fund may be terminated (i) upon
the sale of its assets to another issuer, or (ii) upon
liquidation and distribution of the assets of the Fund, in either
case if such action is approved by the vote of the holders of a
majority of the outstanding shares of the Fund. If not so
terminated, the Fund will continue indefinitely.
<PAGE>
APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
FOR CLASS I AND Y SHARES ONLY
PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
PFPC Inc.
400 Bellevue Parkway, Wilmington, DE 19809
Tel.# 1-800-872-5860
STEP 1
A. ACCOUNT REGISTRATION
___Individual Use line 1
___Joint Account* Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
* Joint Accounts will be Joint Tenants with rights of survivorship
unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.
Please type or print name exactly as account is to be registered
1.________________________________________________________________
First Name Middle Initial Last Name Social Security Number
2.________________________________________________________________
First Name Middle Initial Last Name Social Security Number
3.________________________________________________________________
Custodian's First Name Middle Initial Last Name
Custodian for ____________________________________________________
Minor's First Name Middle Initial Last Name
Under the ___________UGTMA** _____________________________________
Name of State Minors Social Security Number
4. ____________________________________________________
____________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s)
of Trustees in which account will be registered and the name and date
of the Trust Instrument. Account for a Pension or Profit Sharing Plan
or Trust may be registered in the name of the Plan or Trust itself.)
___________________________________________________________________
Tax I.D. Number Authorized Individual Title
B. MAILING ADDRESS AND TELEPHONE NUMBER
____________________________________________________
Street or PO Box City
_______________________________(______)______________
State Zip Daytime Phone Number
Occupation:________________________Employer:________________________
Employer's Address:__________________________________________________
Street Address: City State Zip
Citizen or resident of: ___ U.S. ___ Other Check here ___ if you
are a non-U.S. Citizen or resident and not subject to back-up
withholding (See certification in Step 4, Section B, below.)
C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)
_______________________ _____________________________
Dealer Name Branch Number
_______________________ _____________________________
Street Address Rep. Number/Name
_______________________ (_______)_____________________
City State Zip Area Code Telephone
STEP 2
PURCHASES OF SHARES
A. INITIAL INVESTMENT
(Indicate Class of Shares)
Indicate Method of Payment (For either method, make check
payable to: CHURCHILL TAX-FREE FUND OF KENTUCKY)
___Initial Investment $ ______________ (Minimum investment $100,000 for
Fiduciaries and $250,000 for all other eligible purchasers)
B. DISTRIBUTIONS
All income dividends and capital gains distributions are automatically
reinvested in additional shares at Net Asset Value unless otherwise
indicated below.
Dividends are to be:___ Reinvested ___Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
* For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account.
ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK
showing the Financial Institution account where I/we would like you
to deposit the dividend. (A Financial Institution is a commercial
bank, savings bank or credit union.)
___ Mail check to my/our address listed in Step 1.
STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to have amounts
automatically drawn on your Financial Institution account and invested
in your Churchill Tax-Free Fund of Kentucky Account. To establish this
program, please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day or ___ 16th day of the month (or on
the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No
This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling
toll-free at 1-800-872-5860. To establish this program, please
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)
C. AUTOMATIC WITHDRAWAL PLAN
(Available only to shareholders who had Class Y Shares before
April 30, 1998.)
(Minimum investment $5,000)
Application must be received in good order at least 2 weeks
prior to 1st actual liquidation date.
(Check appropriate box)
___ Yes ___ No
Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, PFPC Inc.(the Agent)
is authorized to redeem sufficient shares from this account at the then
current Net Asset Value, in accordance with the terms below:
Dollar Amount of each withdrawal $ ______________beginning________________ .
Minimum: $50 Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
Checks should be made payable as indicated below. If check is
payable to a Financial Institution for your account, indicate
Financial Institution name, address and your account number.
_______________________________ ______________________________________
First Name Middle Initial Last Name Financial Institution Name
_______________________________ ______________________________________
Street Financial Institution Street Address
_______________________________ ______________________________________
City State Zip City State Zip
____________________________________
Financial Institution Account Number
D. TELEPHONE EXCHANGE
(Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your
name within the Aquila SM Group of Funds by telephone.
The Agent is authorized to accept and act upon my/our or any other
persons telephone instructions to execute the exchange of shares of one
Aquila-sponsored fund for shares of another Aquila-sponsored fund with
identical shareholder registration in the manner described in the
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorneys fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.
E. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution
account listed.
Cash proceeds in any amount from the redemption of shares will
be mailed or wired, whenever possible, upon request, if in an amount
of $1,000 or more to my/our account at a Financial Institution. The
Financial Institution account must be in the same name(s) as this
Fund account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________ ____________________________________
Account Registration Financial Institution Account Number
_______________________________ ____________________________________
Financial Institution Name Financial Institution Transit/Routing
Number
_______________________________ ____________________________________
Street City State Zip
STEP 4
Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS
IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to
my/our account any drafts or debits drawn on my/our account initiated
by the Agent, PFPC Inc., and to pay such sums in accordance therewith,
provided my/our account has sufficient funds to cover such drafts or
debits. I/We further agree that your treatment of such orders will be
the same as if I/we personally signed or initiated the drafts or debits.
I/We understand that this authority will remain in effect until you
receive my/our written instructions to cancel this service. I/We also
agree that if any such drafts or debits are dishonored, for any
reason, you shall have no liabilities.
Financial Institution Account Number _______________________________________
Name and Address where my/our account is maintained
Name of Financial Institution______________________________________________
Street Address_____________________________________________________________
City___________________________________________State _________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account is
registered
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
______________________________________________
(Please Print)
X_____________________________________________ __________________
(Signature) (Date)
INDEMNIFICATION AGREEMENT
To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila
Distributors, Inc. (the "Distributor") agrees:
1 Electronic Funds Transfer debit and credit items transmitted pursuant
to the above authorization shall be subject to the provisions of the
Operating Rules of the National Automated Clearing House Association.
2 To indemnify and hold you harmless from any loss you may suffer in
connection with the execution and issuance of any electronic debit
in the normal course of business initiated by the Agent (except
any loss due to your payment of any amount drawn against insufficient
or uncollected funds), provided that you promptly notify us in
writing of any claim against you with respect to the same, and further
provided that you will not settle or pay or agree to settle or pay any
such claim without the written permission of the Distributor.
3 To indemnify you for any loss including your reasonable costs and
expenses in the event that you dishonor, with or without cause,
any such electronic debit.
STEP 4
Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED
- - The undersigned warrants that he/she has full authority and is of
legal age to purchase shares of the Fund and has received and
read a current Prospectus of the Fund and agrees to its terms.
- - I/We authorize the Fund and its agents to act upon these
instructions for the features that have been checked.
- - I/We acknowledge that in connection with an Automatic Investment or
Telephone Investment, if my/our account at the Financial Institution
has insufficient funds, the Fund and its agents may cancel the
purchase transaction and are authorized to liquidate other shares or
fractions thereof held in my/our Fund account to make up any deficiency
resulting from any decline in the net asset value of shares so
purchased and any dividends paid on those shares. I/We authorize the
Fund and its agents to correct any transfer error by a debit or credit
to my/our Financial Institution account and/or Fund account and to
charge the account for any related charges. I/We acknowledge that
shares purchased either through Automatic Investment or Telephone
Investment are subject to applicable sales charges.
- - The Fund, the Agent and the Distributor and their Trustees, directors,
employees and agents will not be liable for acting upon instructions
believed to be genuine, and will not be responsible for any losses
resulting from unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify the identity of the caller.
The Agent will request some or all of the following information: account
name and number; name(s) and social security number registered to the
account and personal identification; the Agent may also record calls.
Shareholders should verify the accuracy of confirmation statements
immediately upon receipt. Under penalties of perjury, the undersigned
whose Social Security (Tax I.D.) Number is shown above certifies
(i) that Number is my correct taxpayer identification number and
(ii) currently I am not under IRS notification that I am subject to
backup withholding (line out (ii) if under notification). If no such
Number is shown, the undersigned further certifies, under penalties
of perjury, that either (a) no such Number has been issued, and a
Number has been or will soon be applied for; if a Number is not
provided to you within sixty days, the undersigned understands that
all payments (including liquidations) are subject to 31% withholding
under federal tax law, until a Number is provided and the undersigned
may be subject to a $50 I.R.S. penalty; or (b) that the undersigned
is not a citizen or resident of the U.S.; and either does not expect
to be in the U.S. for 183 days during each calendar year and does
not conduct a business in the U.S. which would receive any gain from
the Fund, or is exempt under an income tax treaty.
NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW.
FOR A TRUST, ALL TRUSTEES MUST SIGN.*
__________________________ ____________________________ _________
Individual (or Custodian) Joint Registrant, if any Date
__________________________ ____________________________ _________
Corporate Officer, Partner, Title Date
Trustee, etc.
* For Trust, Corporations or Associations, this form must be accompanied
by proof of authority to sign, such as a certified copy of the corporate
resolution or a certificate of incumbency under the trust instrument.
SPECIAL INFORMATION
- - Certain features (Automatic Investment, Telephone Investment,
Expedited Redemption and Direct Deposit of Dividends) are effective
15 days after this form is received in good order by the Fund's Agent.
- - You may cancel any feature at any time, effective 3 days after the
Agent receives written notice from you.
- - Either the Fund or the Agent may cancel any feature, without prior
notice, if in its judgment your use of any feature involves unusual
effort or difficulty in the administration of your account.
- - The Fund reserves the right to alter, amend or terminate any or all
features or to charge a service fee upon 30 days written notice to
shareholders except if additional notice is specifically required by
the terms of the Prospectus.
BANKING INFORMATION
- - If your Financial Institution account changes, you must complete a
Ready Access features form which may be obtained from Aquila
Distributors at 1-800-872-5859 and send it to the Agent together
with a "voided" check or pre-printed deposit slip from the new
account. The new Financial Institution change is effective in 15
days after this form is received in good order by the Fund's Agent.
AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees to
the terms and conditions applicable to such plans, as stated below.
1. The Agent will administer the Automatic Withdrawal Plan
(the "Plan") as agent for the person (the "Planholder") who
executed the Plan authorization.
2. Certificates will not be issued for shares of the Fund purchased
for and held under the Plan, but the Agent will credit all such
shares to the Planholder on the records of the Fund. Any share
certificates now held by the Planholder may be surrendered
unendorsed to the Agent with the application so that the shares
represented by the certificate may be held under the Plan.
3. Dividends and distributions will be reinvested in shares of the
Fund at Net Asset Value without a sales charge.
4. Redemptions of shares in connection with disbursement payments
will be made at the Net Asset Value per share in effect at the
close of business on the last business day of the month or quarter.
5. The amount and the interval of disbursement payments and the address
to which checks are to be mailed may be changed, at any time, by the
Planholder on written notification to the Agent. The Planholder
should allow at least two weeks time in mailing such notification
before the requested change can be put in effect.
6. The Planholder may, at any time, instruct the Agent by written notice
(in proper form in accordance with the requirements of the then current
Prospectus of the Fund) to redeem all, or any part of, the shares held
under the Plan. In such case the Agent will redeem the number of shares
requested at the Net Asset Value per share in effect in accordance with
the Fund's usual redemption procedures and will mail a check for the
proceeds of such redemption to the Planholder.
7. The Plan may, at any time, be terminated by the Planholder on written
notice to the Agent, or by the Agent upon receiving directions to that
effect from the Fund. The Agent will also terminate the Plan upon
receipt of evidence satisfactory to it of the death or legal
incapacity of the Planholder. Upon termination of the Plan by the
Agent or the Fund, shares remaining unredeemed will be held in an
uncertificated account in the name of the Planholder, and the account
will continue as a dividend-reinvestment, uncertificated account
unless and until proper instructions are received from the Planholder,
his executor or guardian, or as otherwise appropriate.
8. The Agent shall incur no liability to the Planholder for any action
taken or omitted by the Agent in good faith.
9. In the event that the Agent shall cease to act as transfer agent for
the Fund, the Planholder will be deemed to have appointed any successor
transfer agent to act as his agent in administering the Plan.
10.Purchases of additional shares concurrently with withdrawals are
undesirable because of sales charges when purchases are made.
Accordingly, a Planholder may not maintain this Plan while
simultaneously making regular purchases. While an occasional lump sum
investment may be made, such investment should normally be an amount
equivalent to three times the annual withdrawal or $5,000, whichever
is less.
<PAGE>
INVESTMENT SUB-ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
INVESTMENT ADVISER, ADMINISTRATOR AND FOUNDER
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Diana P. Herrmann Douglas Dean
Theodore T. Mason Anne J. Mills
William J. Nightingale James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
TABLE OF CONTENTS
Highlights.......................................
Table of Expenses................................
Financial Highlights.............................
Introduction.....................................
Investment Of The Fund's Assets..................
Investment Restrictions.........................
Net Asset Value Per Share.......................
How To Invest In The Fund.......................
How To Redeem Your Investment...................
Automatic Withdrawal Plan.......................
Management Arrangements.........................
Dividend And Tax Information....................
Exchange Privilege..............................
General Information.............................
Application
AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY
A tax-free
income investment
[LOGO]
PROSPECTUS
One Of The
Aquilasm Group Of Funds
<PAGE>
Aquila
Churchill Tax-Free Fund of Kentucky
380 Madison Avenue Suite 2300
New York, New York 10017
800-USA-KTKY (800-872-5859)
212-697-6666
Statement of Additional Information April 30, 1998
This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. There are two Prospectuses for
the Fund dated April 30, 1998: one Prospectus describes Front-
Payment Class Shares ("Class A Shares") and Level-Payment Class
Shares ("Class C Shares") of the Fund and the other describes
Institutional Class Shares ("Class Y Shares") and Financial
Intermediary Class Shares ("Class I Shares") of the Fund.
References in the Additional Statement to "the Prospectus" refer
to either of these Prospectuses. The Additional Statement should
be read in conjunction with the Prospectus for the class of
shares in which you are considering investing. Either or both
Prospectuses may be obtained from the Fund's Shareholder
Servicing Agent, PFPC Inc. by writing to it at: 400 Bellevue
Parkway, Wilmington, DE 19809 or by calling:
800-872-5860 toll free
or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to it at 380 Madison Avenue, Suite 2300, New York, New
York 10017; or by calling:
800-872-5859 toll free or 212-697-6666
The Annual Report of the Fund for the fiscal year ended
December 31, 1997 (audited) will be delivered with the Additional
Statement.
TABLE OF CONTENTS
Investment of the Fund's Assets . . . . . . . . . . . . . . . .2
Municipal Bonds . . . . . . . . . . . . . . . . . . . . . . . .7
Performance . . . . . . . . . . . . . . . . . . . . . . . . . .9
Investment Restrictions. . . . . . . . . . . . . . . . . . . . 14
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . 15
Shareholder Services Plan. . . . . . . . . . . . . . . . . . . 22
Limitation of Redemptions in Kind. . . . . . . . . . . . . . . 23
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . 24
Additional Information as to Management Arrangements . . . . . 27
Computation of Net Asset Value . . . . . . . . . . . . . . . . 35
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . . . 36
Additional Tax Information . . . . . . . . . . . . . . . . . . 36
Conversion of Class C Shares . . . . . . . . . . . . . . . . . 37
General Information. . . . . . . . . . . . . . . . . . . . . . 37
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<PAGE>
INVESTMENT OF THE FUND'S ASSETS
The investment objective and policies of the Fund are
described in the Prospectus, which refers to the matters
described below. See the Prospectus for the definition of
"Kentucky Obligations."
Ratings
The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") represent
their respective opinions of the quality of the municipal bonds
and notes which they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of
quality. Consequently, obligations with the same maturity, stated
interest rate and rating may have different yields, while
obligations of the same maturity and stated interest rate with
different ratings may have the same yield. See Appendix A to this
Additional Statement for further information about the ratings of
Moody's and S&P as to the various rated Kentucky Obligations
which the Fund may purchase.
The table below gives information as to the percentage of
Fund net assets invested, as of December 31, 1997, in Kentucky
Obligations in the various rating categories:
Highest rating (1) . . . . . . . . . . . . . . . . .54.3%
Second highest rating(2). . . . . . . . . . . . . . . .15.8%
Third highest rating(3) . . . . . . . . . . . . . . . .27.3%
Fourth highest rating(4). . . . . . . . . . . . . . . . 2.3%
Not rated(5). . . . . . . . . . . . . . . . . . . . . . 0.3%
100%
(1) Aaa of Moody's or AAA of S&P (or other highest rating).
(2) Aa of Moody's or AA of S&P (or other second highest rating).
(3) A of Moody's or A of S&P (or other third highest rating).
(4) Baa of Moody's or BBB of S&P (or other fourth highest
rating).
(5) Bonds not rated by Moody's or S&P are assigned a rating by
the Sub-Adviser. Such rating must be the equivalent of one of the
above ratings.
When-Issued and Delayed Delivery Obligations
The Fund may buy Kentucky Obligations on a when-issued or
delayed delivery basis. The purchase price and the interest rate
payable on the Kentucky Obligations are fixed on the transaction
date. At the time the Fund makes the commitment to purchase
Kentucky Obligations on a when-issued or delayed delivery basis,
it will record the transaction and thereafter reflect the value
each day of such Kentucky Obligations in determining its net
asset value. The Fund will make commitments for such when-issued
transactions only when it has the intention of actually acquiring
the Kentucky Obligations. The Fund places an amount of assets
equal in value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account, which is marked to market every business day.
On delivery dates for such transactions, the Fund will meet its
commitments by selling the Kentucky Obligations held in the
separate account and/or from cash flow.
Determination of the Marketability of Certain Securities
In determining marketability of floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) the Board of Trustees will consider
the following factors, not all of which may be applicable to any
particular issue: the quality, maturity and coupon rate of the
issue, ratings received from the nationally recognized
statistical rating organizations and any changes or prospective
changes in such ratings, the likelihood that the issuer will
continue to appropriate the required payments for the issue,
recent purchases and sales of the same or similar issues, the
general market for municipal securities of the same or similar
quality, the Adviser's opinion as to marketability of the issue
and other factors that may be applicable to any particular issue.
Futures Contracts and Options
Although the Fund does not presently do so and may in
fact never do so, it is permitted to buy and sell futures
contracts relating to municipal bond indices ("Municipal Bond
Index Futures") and to U.S. Government securities ("U.S.
Government Securities Futures," together referred to as
"Futures"), and exchange traded options based on Futures as a
possible means to protect the asset value of the Fund during
periods of changing interest rates. The following discussion is
intended to explain briefly the workings of Futures and options
on them which would be applicable if the Fund were to use
them.
Unlike when the Fund purchases or sells a Kentucky
Obligation, no price is paid or received by the Fund upon the
purchase or sale of a Future. Initially, however, when such
transactions are entered into, the Fund will be required to
deposit with the futures commission merchant ("broker") an amount
of cash or Kentucky Obligations equal to a varying specified
percentage of the contract amount. This amount is known as
initial margin. Subsequent payments, called variation margin, to
and from the broker, will be made on a daily basis as the price
of the underlying index or security fluctuates making the Future
more or less valuable, a process known as marking to market.
Insolvency of the broker may make it more difficult to recover
initial or variation margin. Changes in variation margin are
recorded by the Fund as unrealized gains or losses. Margin
deposits do not involve borrowing by the Fund and may not be used
to support any other transactions. At any time prior to
expiration of the Future, the Fund may elect to close the
position by taking an opposite position which will operate to
terminate the Fund's position in the Future. A final
determination of variation margin is then made. Additional cash
is required to be paid by or released to the Fund and it realizes
a gain or a loss. Although Futures by their terms call for the
actual delivery or acceptance of cash, in most cases the
contractual obligation is fulfilled without having to make or
take delivery. All transactions in the futures markets are
subject to commissions payable by the Fund and are made, offset
or fulfilled through a clearing house associated with the
exchange on which the contracts are traded. Although the Fund
intends to buy and sell Futures only on an exchange where there
appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular
Future at any particular time. In such event, or in the event of
an equipment failure at a clearing house, it may not be possible
to close a futures position.
Municipal Bond Index Futures currently are based on a
long-term municipal bond index developed by the Chicago Board of
Trade ("CBT") and The Bond Buyer (the "Municipal Bond Index").
Financial Futures contracts based on the Municipal Bond Index
began trading on June 11, 1985. The Municipal Bond Index is
comprised of 40 tax-exempt municipal revenue and general
obligation bonds. Each bond included in the Municipal Bond Index
must be rated A or higher by Moody's or S&P and must have a
remaining maturity of 19 years or more. Twice a month new issues
satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond
Index. The value of the Municipal Bond Index is computed daily
according to a formula based on the price of each bond in the
Municipal Bond Index, as evaluated by six dealer-to-dealer
brokers.
The Municipal Bond Index Futures contract is traded only
on the CBT. Like other contract markets, the CBT assures
performance under futures contracts through a clearing
corporation, a nonprofit organization managed by the exchange
membership which is also responsible for handling daily
accounting of deposits or withdrawals of margin.
There are at present U.S. Government Securities Futures
contracts based on long-term Treasury bonds, Treasury notes, GNMA
Certificates and three-month Treasury bills. U.S. Government
Securities Futures have traded longer than Municipal Bond Index
Futures, and the depth and liquidity available in the trading
markets for them are in general greater.
Call Options on Futures Contracts. The Fund may also
purchase and sell exchange traded call and put options on
Futures. The purchase of a call option on a Future is analogous
to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the
Future upon which it is based, or upon the price of the
underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities.
Like the purchase of a futures contract, the Fund may purchase a
call option on a Future to hedge against a market advance when
the Fund is not fully invested.
The writing of a call option on a Future constitutes a
partial hedge against declining prices of the securities which
are deliverable upon exercise of the Future. If the price at
expiration of the Future is below the exercise price, the Fund
will retain the full amount of the option premium which provides
a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of put
options on a Future is analogous to the purchase of protective
put options on portfolio securities. The Fund may purchase a put
option on a Future to hedge the Fund's portfolio against the risk
of rising interest rates.
The writing of a put option on a Future constitutes a
partial hedge against increasing prices of the securities which
are deliverable upon exercise of the Future. If the Future price
at expiration is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities
which the Fund intends to purchase.
The writer of an option on a Future is required to deposit
initial and variation margin pursuant to requirements similar to
those applicable to Futures. Premiums received from the writing
of an option will be included in initial margin. The writing of
an option on a Future involves risks similar to those relating to
Futures.
Risk Factors in Futures Transactions and Options
One risk in employing Futures or options on them to attempt
to protect against the price volatility of the Fund's Kentucky
Obligations is that the Adviser could be incorrect in its
expectations as to the extent of various interest rate movements
or the time span within which the movements take place. For
example, if the Fund sold a Future in anticipation of an increase
in interest rates, and then interest rates went down instead, the
Fund would lose money on the sale.
Another risk as to Futures or options on them arises because
of the imperfect correlation between movement in the price of the
Future and movements in the prices of the Kentucky Obligations
which are the subject of the hedge. The risk of imperfect
correlation increases as the composition of the Fund's portfolio
diverges from the municipal bonds included in the applicable
index or from the security underlying the U.S. Government
Securities Futures. The price of the Future or option may move
more than or less than the price of the Kentucky Obligations
being hedged. If the price of the Future or option moves less
than the price of the Kentucky Obligations which are the subject
of the hedge, the hedge will not be fully effective but, if the
price of the Kentucky Obligations being hedged has moved in an
unfavorable direction, the Fund would be in a better position
than if it had not hedged at all. If the price of the Kentucky
Obligations being hedged has moved in a favorable direction, this
advantage will be partially offset by the Future or option. If
the price of the Future or option has moved more than the price
of the Kentucky Obligations, the Fund will experience either a
loss or gain on the Future or option which will not be completely
offset by movements in the price of the Kentucky Obligations
which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the Kentucky
Obligations being hedged and movements in the price of the
Futures or options, the Fund may buy or sell Futures or options
in a greater dollar amount than the dollar amount of the Kentucky
Obligations being hedged if the historical volatility of the
prices of the Kentucky Obligations being hedged is less than the
historical volatility of the debt securities underlying the
hedge. It is also possible that, where the Fund has sold Futures
or options to hedge its portfolio against decline in the market,
the market may advance and the value of the Kentucky Obligations
held in the Fund's portfolio may decline. If this occurred the
Fund would lose money on the Future or option and also experience
a decline in value of its portfolio securities.
Where Futures or options are purchased to hedge against a
possible increase in the price of Kentucky Obligations before the
Fund is able to invest in them in an orderly fashion, it is
possible that the market may decline instead; if the Fund then
concludes not to invest in them at that time because of concern
as to possible further market decline or for other reasons, the
Fund will realize a loss on the Futures or options that is not
offset by a reduction in the price of the Kentucky Obligations
which it had anticipated purchasing.
The particular municipal bonds comprising the index
underlying Municipal Bond Index Futures will vary from the bonds
held by the Fund. The correlation of the hedge with such bonds
may be affected by disparities in the average maturity, ratings,
geographical mix or structure of the Fund's investments as
compared to those comprising the Index, and general economic or
political factors. In addition, the correlation with movements in
the value of the Municipal Bond Index may be subject to change
over time, as additions to and deletions from the Municipal Bond
Index alter its structure. The correlation between U.S.
Government Securities Futures and the municipal bonds held by the
Fund may be adversely affected by similar factors and the risk of
imperfect correlation between movements in the prices of such
Futures and the prices of Municipal Bonds held by the Fund may be
greater.
Trading in Municipal Bond Index Futures may be less liquid
than that in other Futures. The trading of Futures and options is
also subject to certain market risks, such as inadequate trading
activity or limits on upward or downward price movements which
could at times make it difficult or impossible to liquidate
existing positions.
Regulatory Aspects of Futures and Options
The Fund will, due to requirements under the Investment
Company Act of 1940 (the "1940 Act"), deposit in a segregated
account Kentucky Obligations maturing in one year or less or
cash, in an amount equal to the fluctuating market value of long
Futures or options it has purchased, less any margin deposited on
long positions.
The Fund must operate as to its long and short positions
in Futures in conformity with a rule (the "CFTC Rule") adopted by
the Commodity Futures Trading Commission ("CFTC") under the
Commodity Exchange Act (the "CEA") to be eligible for the
exclusion provided by the CFTC Rule as a "commodity pool
operator" (as defined under the CEA). Under these restrictions
the Fund will not, as to any positions, whether long, short or a
combination thereof, enter into Futures or options for which the
aggregate initial margins and premiums paid for options exceed 5%
of the fair market value of its assets. Under the restrictions,
the Fund also must, as to its short positions, use Futures and
options solely for bona-fide hedging purposes within the meaning
and intent of the applicable provisions under the CEA. As to the
Fund's long positions which are used as part of its portfolio
strategy and are incidental to its activities in the underlying
cash market, the "underlying commodity value" (see below) of its
Futures must not exceed the sum of (i) cash set aside in an
identifiable manner, or short-term U.S. debt obligations or other
U.S. dollar-denominated high quality short-term money market
instruments so set aside, plus any funds deposited as margin;
(ii) cash proceeds from existing investments due in 30 days and
(iii) accrued profits held at the futures commission merchant.
(There is described above the segregated account which the Fund
must maintain as to its Futures and options activities due to
requirements other than those of the CFTC Rule; the Fund will, as
to long positions, be required to abide by the more restrictive
of this other requirement or the above requirements of the CFTC
Rule.) The "underlying commodity value" of a Future or option is
computed by multiplying the size of the Future by the daily
settlement price of the Future or option.
The "sale" of a Future means the acquisition by the Fund
of an obligation to deliver an amount of cash equal to a
specified dollar amount times the difference between the value of
the index or government security at the close of the last trading
day of the Future and the price at which the Future is
originally struck (which the Fund anticipates will be lower
because of a subsequent rise in interest rates and a
corresponding decline in the index value). This is referred to as
having a "short" Futures position. The "purchase" of a Future
means the acquisition by the Fund of a right to take delivery of
such an amount of cash. In this case, the Fund anticipates that
the closing value will be higher than the price at which the
Future is originally struck. This is referred to as having a
"long" futures position. No physical delivery of the bonds making
up the index or the U.S. government securities, as the case may
be, is made as to either a long or a short futures position.
Portfolio Turnover
A portfolio turnover rate is, in general, the percentage
computed by taking the lesser of purchases or sales of portfolio
securities for a year and dividing it by the monthly average
value of such securities during the year, excluding certain
short-term securities. Since the turnover rate of the Fund will
be affected by a number of factors, the Fund is unable to predict
what rate the Fund will have in any particular period or periods,
although such rate is not expected to exceed 100%. However, the
rate could be substantially higher or lower in any particular
period.
MUNICIPAL BONDS
The two principal classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full
faith, credit and unlimited taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or projects or, in a few cases, from the
proceeds of a special excise or other tax, but are not supported
by the issuer's power to levy unlimited general taxes. There are,
of course, variations in the security of municipal bonds, both
within a particular classification and between classifications,
depending on numerous factors. The yields of municipal bonds
depend on, among other things, general financial conditions,
general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and rating of
the issue.
Since the Fund may invest in industrial development bonds or
private activity bonds, the Fund may not be an appropriate
investment for entities which are "substantial users" of
facilities financed by those bonds or for investors who are
"related persons" of such users. Generally, an individual will
not be a "related person" under the Internal Revenue Code unless
such investor or his or her immediate family (spouse, brothers,
sisters and lineal descendants) own directly or indirectly in the
aggregate more than 50 percent of the equity of a corporation or
is a partner of a partnership which is a "substantial user" of a
facility financed from the proceeds of those bonds. A
"substantial user" of such facilities is defined generally as a
"non-exempt person who regularly uses a part of [a] facility"
financed from the proceeds of industrial development or private
activity bonds.
Because of constitutional limitations, the Commonwealth of
Kentucky cannot enter into a financial obligation of more than
two years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than
one year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal
revenue bonds in other States. For example, most local school
construction is financed from the proceeds of bonds nominally
issued by a larger city or county government, which holds legal
title to the school, subject to a year-to-year renewable
leaseback arrangement with the local school district. Similar
arrangements are used to finance many city and county
construction projects but in these cases, the bonds are nominally
issued in the name of a public corporation, which holds title to
the project and leases the project back to the city or county on
a year-to-year renewable basis. In both situations, the rent that
the nominal issuer receives from the actual user of the property
financed by the bonds is the only source of any security for the
payment of the bonds, so that a failure by the user to renew the
lease in any year will put the bonds into default. However, there
is no reported instance in which a Kentucky school bond has gone
into default. In determining marketability of any such issue, the
Board of Trustees will consider the following factors, not all of
which may be applicable to any particular issue: the quality,
maturity and coupon rate of the issue, ratings received from the
nationally recognized statistical rating organizations and any
changes or prospective changes in such ratings, the likelihood
that the issuer will continue to appropriate the required
payments for the issue, recent purchases and sales of the same or
similar issues, the general market for municipal securities of
the same or similar quality, the Sub-Adviser's opinion as to
marketability of the issue and other factors that may be
applicable to any particular issue.
As indicated in the Prospectus, there are certain Kentucky
Obligations the interest on which is subject to the Federal
alternative minimum tax on individuals. While the Fund may
purchase these obligations, it may, on the other hand, refrain
from purchasing particular Kentucky Obligations due to this tax
consequence. Also, as indicated in the Prospectus, the Fund will
not purchase obligations of Kentucky issuers the interest on
which is subject to regular Federal income tax. The foregoing may
reduce the number of issuers of obligations which are available
to the Fund.
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time
quote various performance figures to illustrate its past
performance.
Performance quotations by investment companies are
subject to rules of the Securities and Exchange Commission
("SEC"). These rules require the use of standardized performance
quotations or, alternatively, that every non-standardized
performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required
by the SEC. Current yield and average annual compounded total
return quotations used by the Fund are based on these
standardized methods and are computed separately for each of the
Fund's three classes of shares. Prior to April 1, 1996, the Fund
had outstanding only one class of shares which are currently
designated "Class A Shares." On that date the Fund began to offer
shares of two other classes, Class C Shares and Class Y Shares.
During most of the historical periods listed below, there were no
Class C Shares or Class Y Shares outstanding and the information
below relates solely to Class A Shares unless otherwise
indicated. Class I Shares were first offered on April 30, 1998
and none were outstanding during the periods indicated. Each of
these and other methods that may be used by the Fund are
described in the following material.
Total Return
Average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5- and 10-
year periods and a period since the inception of the operations
of the Fund (on May 21, 1987) that would equate an initial
hypothetical $1,000 investment to the value such an investment in
shares of each of the Fund's classes of shares would have if it
were completely redeemed at the end of each such period.
In the case of Class A Shares, the calculation assumes
the maximum sales charge is deducted from the hypothetical
initial $1,000 purchase. In the case of Class C Shares, the
calculation assumes the applicable Contingent Deferred Sales
Charge ("CDSC") imposed on a redemption of Class C Shares held
for the period is deducted. In the case of Class Y Shares, the
calculation assumes that no sales charge is deducted and no CDSC
is imposed. For all three classes, it is assumed that on each
reinvestment date during each such period any capital gains are
reinvested at net asset value, and all income dividends are
reinvested at net asset value, without sales charge (because the
Fund does not impose any sales charge on reinvestment of
dividends for any class). The computation further assumes that
the entire hypothetical account was completely redeemed at the
end of each such period.
Investors should note that the maximum sales charge (4%)
reflected in the following quotations for Class A Shares is a one
time charge, paid at the time of initial investment. The greatest
impact of this charge is during the early stages of an investment
in the Fund. Actual performance will be affected less by this one
time charge the longer an investment remains in the Fund.
Average Annual Compounded Rates of Return:
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 3.75% 6.11% 8.34%
Five Years 5.60% N/A N/A
Ten Years 7.73% N/A N/A
Since
inception on
May 21, 1987 7.20% 6.81%(1) 7.78%(1)
<FN>
(1) Period from April 1, 1996 (inception of class) through
December 31, 1997.
</FN>
</TABLE>
These figures were calculated according to the following SEC
formula:
n
P(1+T) = ERV
where
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1-, 5- and 10-year periods or the period
since inception, at the end of each such
period.
As discussed in the Prospectus, the Fund may quote total
rates of return in addition to its average annual total return
for each of its classes of shares. Such quotations are computed
in the same manner as the Fund's average annual compounded rate,
except that such quotations will be based on the Fund's actual
return for a specified period as opposed to its average return
over the periods described above.
Total Return
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
One Year 3.75% 6.11% 8.31%
Five Years 31.31% N/A N/A
Ten Years 110.53% N/A N/A
Since
inception on
May 21, 1987 109.26 12.22%(1) 14.02%(1)
<FN>
(1) Period from April 1, 1996 (inception of class) through
December 31, 1997.
</FN>
</TABLE>
In general, actual total rate of return will be lower than
the average annual rate of return because the average annual rate
of return reflects the effect of compounding. See discussion of
the impact of the sales charge on quotations of rates of return,
above.
Yield
Current yield reflects the income per share earned by the
Fund's portfolio investments. Current yield is determined by
dividing the net investment income per share earned for each of
the Fund's classes of shares during a 30-day base period by the
maximum offering price per share on the last day of the period
and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of each class during
the base period net of fee waivers and reimbursements of
expenses, if any.
The Fund may also quote a taxable equivalent yield for each
of its classes of shares which shows the taxable yield that would
be required to produce an after-tax yield equivalent to that of a
fund which invests in tax-exempt obligations. Such yield is
computed by dividing that portion of the yield of the Fund
(computed as indicated above) which is tax-exempt by one minus
the highest applicable combined federal and Kentucky income tax
rate (and adding the result to that portion of the yield of the
Fund that is not tax-exempt, if any).
The Kentucky and the combined Kentucky and federal income
tax rates upon which the Fund's tax equivalent yield quotations
are based are 6.0% and 44.34% respectively. The latter rate
reflects currently-enacted Federal income tax law. From time to
time, as any changes to such rates become effective, tax
equivalent yield quotations advertised by the Fund will be
updated to reflect such changes. Any tax rate increases will tend
to make a tax-free investment, such as the Fund, relatively more
attractive than taxable investments. Therefore, the details of
specific tax increases may be used in Fund sales material.
Yield for the 30-day period ended December 31, 1997 (the
date of the Fund's most recent audited financial statements:
<TABLE>
<CAPTION>
Class A Shares Class C Shares Class Y Shares
<S> <C> <C> <C>
Yield 4.16% 3.48% 4.49%
Taxable
Equivalent
Yield 7.24% 6.05% 7.81%
</TABLE>
These figures were obtained using the Securities and
Exchange Commission formula:
6
Yield = 2 [(a-b + 1) -1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of waivers and
reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by
(i) dividing the total amount of dividends per share paid by the
Fund during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's current distribution rate (calculated as
indicated above). The current distribution rate can differ from
the current yield computation because it could include
distributions to shareholders from additional sources (i.e.,
sources other than dividends and interest), such as short-term
capital gains.
Other Performance Quotations
With respect to those categories of investors who are
permitted to purchase Class A Shares of the Fund at net asset
value, the Fund may quote a "Current Distribution for Net Asset
Value Investments." This rate is computed by (i) dividing the
total amount of dividends per share paid by the Fund during a
recent 30-day period by (ii) the current net asset value of the
Fund and by (iii) annualizing the result. Figures for yield,
total return and other measures of performance for Net Asset
Value Investments may also be quoted. These will be derived as
described above with the substitution of net asset value for
public offering price.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used. If distribution rates are quoted in advertising, they will
be accompanied by calculations of current yield in accordance
with the formula of the Securities and Exchange Commission.
The Fund may include in advertisements and sales literature,
information, examples and statistics that illustrate the effect
of taxable versus tax-free compounding income at a fixed rate of
return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and
capital gains distributions in additional shares. The examples
used will be for illustrative purposes only and are not
representations by the Fund of past or future yield or return.
From time to time, in reports and promotional literature,
the Fund may compare its performance to, or cite the historical
performance of, U.S. Treasury bills, notes and bonds, or indices
of broad groups of unmanaged securities considered to be
representative of, or similar to, that Fund's portfolio holdings,
such as:
Lipper Analytical Services, Inc. ("Lipper") is a
widely-recognized independent service that monitors and ranks the
performance of regulated investment companies. The Lipper
performance analysis includes the reinvestment of capital gain
distributions and income dividends but does not take sales
charges into consideration. The method of calculating total
return data on indices utilizes actual dividends on ex-dividend
dates accumulated for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly
publication of Morningstar, Inc. Morningstar proprietary ratings
reflect historical risk-adjusted performance and are subject to
change every month. Funds with at least three years of
performance history are assigned ratings from one star (lowest)
to five stars (highest). Morningstar ratings are calculated from
the funds' three-, five-, and ten-year average annual returns
(when available) and a risk factor that reflects fund performance
relative to three-month Treasury bill monthly returns. Fund's
returns are adjusted for fees and sales loads. Ten percent of the
funds in an investment category receive five stars, 22.5% receive
four stars, 35% receive three stars, 22.5% receive two stars, and
the bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly
publication which tracks principal return, total return and yield
on the Salomon Brothers Broad Investment-Grade Bond Index and the
components of the Index.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices," a monthly corporate government index publication which
lists principal, coupon and total return on over 100 different
taxable bond indices which Merrill Lynch tracks. They also list
the par weighted characteristics of each Index.
Lehman Brothers, Inc., "The Bond Market Report," a monthly
publication which tracks principal, coupon and total return on
the Lehman Govt./Corp. Index and Lehman Aggregate Bond Index, as
well as all the components of these Indices.
The Consumer Price Index, prepared by the U.S. Bureau of
Labor Statistics, is a commonly used measure of inflation. The
Index shows changes in the cost of selected consumer goods and
does not represent a return on an investment vehicle.
From time to time, in reports and promotional literature,
performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, FINANCIAL TIMES and FORTUNE may also be used. In
addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE
WALL STREET JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS
may be cited.
INVESTMENT RESTRICTIONS
The Fund has a number of policies concerning what it can and
cannot do. Those that are called fundamental policies cannot be
changed unless the holders of a "majority" (as defined in the
1940 Act) of the Fund's outstanding shares vote to change them.
Under the 1940 Act, the vote of the holders of a "majority" of
the Fund's outstanding shares means the vote of the holders of
the lesser of (a) 67% or more of the Fund's shares present at a
meeting or represented by proxy if the holders of more than 50%
of its shares are so present or represented; or (b) more than 50%
of the Fund's outstanding shares. Those fundamental policies not
set forth in the Prospectus are set forth below:
1. The Fund invests only in certain limited securities.
The Fund cannot buy any securities other than Kentucky
Obligations (discussed under "Investment of the Fund's Assets" in
the Prospectus), Municipal Bond Index Futures, U.S. Government
Securities Futures and options on Futures; therefore the Fund
cannot buy any voting securities, any commodities or commodity
contracts other than Municipal Bond Index Futures and U.S.
Government Securities Futures, any mineral related programs or
leases, any shares of other investment companies or any warrants,
puts, calls or combinations thereof other than on Futures.
The Fund cannot buy real estate or any non-liquid interests
in real estate investment trusts; however, it can buy any
securities which it can otherwise buy even though the issuer
invests in real estate or has interests in real estate.
2. The Fund does not buy for control.
The Fund cannot invest for the purpose of exercising control
or management of other companies.
3. The Fund does not sell securities it does not own or borrow
from brokers to buy securities.
Thus, it cannot sell short or buy on margin; however, the
Fund can make margin deposits in connection with the purchase or
sale of Municipal Bond Index Futures, U.S. Government Securities
Futures and options on them, and can pay premiums on these
options.
4. The Fund is not an underwriter.
The Fund cannot engage in the underwriting of securities,
that is, the selling of securities for others. Also, it cannot
invest in restricted securities. Restricted securities are
securities which cannot freely be sold for legal reasons.
DISTRIBUTION PLAN
The Fund's Distribution Plan has four parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II), to distribution payments relating to Class I
Shares (Part III) and to certain defensive provisions (Part
IV).
Provisions Relating to Class A Shares (Part I)
At the date of the Additional Statement, most of the
outstanding shares of the Fund would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Adviser
or the Distributor. The Distributor will consider shares which
are not Qualified Holdings of such unrelated broker-dealers to be
Qualified Holdings of the Distributor and will authorize
Permitted Payments to the Distributor with respect to such shares
whenever Permitted Payments are being made under the Plan.
Part I of the Plan applies only to the Front Payment Class
Shares ("Class A Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part I of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part I ("Class A Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Front Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Front Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.
Subject to the direction and control of the Fund's Board
of Trustees, the Fund may make payments ("Class A Permitted
Payments") to Qualified Recipients, which Class A Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), 0.15 of 1% of the average annual net assets of the
Fund represented by the Front Payment Class Shares. Such payments
shall be made only out of the Fund's assets allocable to the
Front Payment Class Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
as to the amount of Class A Permitted Payments, if any, to each
Qualified Recipient provided that the total Class A Permitted
Payments to all Qualified Recipients do not exceed the amount set
forth above. The Distributor is authorized, but not directed, to
take into account, in addition to any other factors deemed
relevant by it, the following: (a) the amount of the Qualified
Holdings of the Qualified Recipient; (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Front-
Payment Class Shares, including without limitation, any or all of
the following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part I is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class A Permitted
Payments made under Section 9 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the 1940 Act, of
the Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part I originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part I of the Plan; and (ii) by a vote of holders of at
least a "majority" (as so defined) of the outstanding voting
securities of the Front Payment Class Shares class (or of any
predecessor class or category of shares, whether or not
designated as a class) and a vote of holders of at least a
"majority" (as so defined) of the outstanding voting securities
of the Level Payment Class Shares and/or of any other class whose
shares are convertible into Front Payment Class Shares. Part I
has continued, and will, unless terminated as hereinafter
provided, continue in effect, until the June 30 next succeeding
such effectiveness, and from year to year thereafter only so long
as such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part I may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part I
applies. Part I may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part I as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class A Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class A Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class A Plan Agreements entered into thereafter.
Provisions relating to Class C Shares (Part II)
Part II of the Plan applies only to the Level Payment Shares
Class ("Class C Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).
As used in Part II of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part II ("Class C Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Level Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Level Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.
Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class C Permitted
Payments") to Qualified Recipients, which Class C Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), 0.75 of 1% of the average annual net assets of the
Fund represented by the Level Payment Class Shares. Such payments
shall be made only out of the Fund's assets allocable to the
Level Payment Class Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
the amount of Class C Permitted Payments, if any, to each
Qualified Recipient provided that the total Class C Permitted
Payments to all Qualified Recipients do not exceed the amount set
forth above. The Distributor is authorized, but not directed, to
take into account, in addition to any other factors deemed
relevant by it, the following: (a) the amount of the Qualified
Holdings of the Qualified Recipient; (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Level
Payment Class Shares, including without limitation, any or all of
the following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
While Part II is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class C Permitted
Payments made under the Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor,
sub-adviser or Administrator paid or accrued during such quarter.
In addition, if any such Qualified Recipient is an affiliated
person, as that term is defined in the 1940 Act, of the Fund, the
Adviser, the Administrator or the Distributor, such person shall
agree to furnish to the Distributor for transmission to the Board
of Trustees of the Fund an accounting, in form and detail
satisfactory to the Board of Trustees, to enable the Board of
Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part II originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part II of the Plan; and (ii) by a vote of holders of
at least a "majority" (as so defined) of the outstanding voting
securities of the Level Payment Class Shares. Part II has
continued, and will, unless terminated as hereinafter provided,
continue in effect, until the April 30 next succeeding such
effectiveness, and from year to year thereafter only so long as
such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part II may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part II
applies. Part II may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part II as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class C Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class C Plan Agreements entered into thereafter.
Provisions relating to Class I Shares (Part III)
Part III of the Plan applies only to the Financial
Intermediary Class Shares ("Class I Shares") of the Fund
(regardless of whether such class is so designated or is
redesignated by some other name).
As used in Part III of the Plan, "Qualified Recipients"
shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not limited
to any principal underwriter of the Fund, with which the Fund or
the Distributor has entered into written agreements in connection
with Part III ("Class I Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Class I Shares or
servicing of shareholder accounts with respect to such shares.
"Qualified Holdings" shall mean, as to any Qualified Recipient,
all Class I Shares beneficially owned by such Qualified
Recipient, or beneficially owned by its brokerage customers,
other customers, other contacts, investment advisory clients, or
other clients, if the Qualified Recipient was, in the sole
judgment of the Distributor, instrumental in the purchase and/or
retention of such shares and/or in providing administrative
assistance or other services in relation thereto.
Subject to the direction and control of the Fund's Board
of Trustees, the Fund may make payments ("Class I Permitted
Payments") to Qualified Recipients, which Class I Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), at a rate fixed for time to time by the Board of
Trustees, initially 0.10 of 1% of the average annual net assets
of the Fund represented by the Class I Shares, but not more than
0.25 of 1% of such assets. Such payments shall be made only out
of the Fund's assets allocable to Class I Shares. The Distributor
shall have sole authority (i) as to the selection of any
Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class C Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class I Permitted Payments to all Qualified Recipients do
not exceed the amount set forth above. The Distributor is
authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a)
the amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Class I Shares, including without
limitation, any or all of the following activities: answering
customer inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the Fund
may be effected; assisting shareholders in designating and
changing dividend options, account designations and addresses;
providing necessary personnel and facilities to establish and
maintain shareholder accounts and records; assisting in
processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares;
verifying and guaranteeing shareholder signatures in connection
with redemption orders and transfers and changes in shareholder
designated accounts; furnishing (either alone or together with
other reports sent to a shareholder by such person) monthly and
year-end statements and confirmations of purchases and
redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients,the difference will not be carried over to
subsequent years.
While Part III is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class I Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
Part III originally went into effect when it was approved
(i) by a vote of the Trustees, including the Independent
Trustees, with votes cast in person at a meeting called for the
purpose of voting on Part III of the Plan; and (ii) by a vote of
holders of at least a "majority" (as so defined) of the
outstanding voting securities of the Class I Shares Class. Part
III has continued, and will, unless terminated as thereinafter
provided, continue in effect, until the April 30 next succeeding
such effectiveness, and from year to year thereafter only so long
as such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part II may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part III
applies. Part III may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part III as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.
In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class I Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class I Plan Agreements entered into thereafter.
Defensive Provisions (Part IV)
Another part of the Plan (Part IV) states that if and to
the extent that any of the payments listed below are considered
to be "primarily intended to result in the sale of" shares issued
by the Fund within the meaning of Rule 12b-1, such payments are
authorized under the Plan: (i) the costs of the preparation of
all reports and notices to shareholders and the costs of printing
and mailing such reports and notices to existing shareholders,
irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares
of the Fund or other funds or other investments; (ii) the costs
of the preparation and setting in type of all prospectuses and
statements of additional information and the costs of printing
and mailing all prospectuses and statements of additional
information to existing shareholders; (iii) the costs of
preparation, printing and mailing of any proxy statements and
proxies, irrespective of whether any such proxy statement
includes any item relating to, or directed toward, the sale of
the Fund's shares; (iv) all legal and accounting fees relating to
the preparation of any such reports, prospectuses, statements of
additional information, proxies and proxy statements; (v) all
fees and expenses relating to the registration or qualification
of the Fund and/or its shares under the securities or "Blue-Sky"
laws of any jurisdiction; (vi) all fees under the Securities Act
of 1933 and the 1940 Act, including fees in connection with any
application for exemption relating to or directed toward the sale
of the Fund's shares; (vii) all fees and assessments of the
Investment Company Institute or any successor organization,
irrespective of whether some of its activities are designed to
provide sales assistance; (viii) all costs of the preparation and
mailing of confirmations of shares sold or redeemed or share
certificates, and reports of share balances; and (ix) all costs
of responding to telephone or mail inquiries of investors or
prospective investors.
The Plan states that while it is in effect, the selection
and nomination of those Trustees of the Fund who are not
"interested persons" of the Fund shall be committed to the
discretion of such disinterested Trustees but that nothing in the
Plan shall prevent the involvement of others in such selection
and nomination if the final decision on any such selection and
nomination is approved by a majority of such disinterested
Trustees.
The Plan states that while it is in effect, the Fund's
Administrator and Distributor shall report at least quarterly to
the Fund's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this
Plan, the identity of the Qualified Recipient of each Payment,
and the purposes for which the amounts were expended; (ii) all
costs of each item of cost specified in the Plan (making
estimates of such costs where necessary or desirable) during the
preceding calendar or fiscal quarter; and (iii) all fees of the
Fund to the distributor, sub-adviser or administrator paid or
accrued during such quarter. In addition if any such Qualified
Recipient is an affiliate, as that term is defined in the Act, of
the Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.
The Plan defines as the Fund's Independent Trustees those
Trustees who are not "interested persons" of the Fund as defined
in the 1940 Act and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements
related to the Plan. The Plan, unless terminated as therein
provided, continues in effect from year to year only so long as
such continuance is specifically approved at least annually by
the Fund's Board of Trustees and its Independent Trustees with
votes cast in person at a meeting called for the purpose of
voting on such continuance. In voting on the implementation or
continuance of the Plan, those Trustees who vote to approve such
implementation or continuance must conclude that there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders. The Plan may be terminated at any time by vote of a
majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund. The Plan may not be
amended to increase materially the amount of payments to be made
without shareholder approval and all amendments must be approved
in the manner set forth above as to continuance of the Plan.
The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act
as now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part III shall be deemed to be
severable, within the meaning of and to the extent required by
Rule 18f-3, with respect to each outstanding class of shares of
the Fund.
Payments Under the Plan
During the fiscal year ended December 31, 1997, $333,695
was paid to Qualified Recipients with respect to Class A Shares,
of which $6,454 was retained by the Distributor and $4,961 was
paid to Qualified Recipients under the Plan with respect to the
Fund's Class C Shares of which $4,961 was retained by the
Distributor. For the fiscal year ended December 31, 1996, the
Fund paid distribution fees of $338,443 with respect to its Class
A Shares, of which the Distributor retained $4,724, $1,000 with
respect to the Fund's Class C Shares, all of which was retained
by the Distributor. During the fiscal year ended December 31,
1995, $358,097 (all of which were with respect to what are now
called Class A Shares) was paid to Qualified Recipients under the
Plan as then in effect, of which $3,716 was retained by the
Distributor. All of such payments were for compensation.
SHAREHOLDER SERVICES PLAN
The Fund has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to Class
C Shares and Class I Shares of the Fund of "Service Fees" within
the meaning of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. The Services Plan applies
only to the Class C Shares and Class I Shares of the Fund
(regardless of whether such class is so designated or is
redesignated by some other name).
Provisions for Level-Payment Class Shares (Part I)
As used in the Services Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to the
Distributor and any other principal underwriter of the Fund, who
have, pursuant to written agreements with the Fund or the
Distributor, agreed to provide personal services to shareholders
of Level Payment Class Shares and/or maintenance of Level Payment
Class Shares shareholder accounts. "Qualified Holdings" shall
mean, as to any Qualified Recipient, all Level Payment Class
Shares beneficially owned by such Qualified Recipient's
customers, clients or other contacts. "Administrator" shall mean
Aquila Management Corporation or any successor serving as
sub-adviser or administrator of the Fund.
Subject to the direction and control of the Fund's Board
of Trustees, the Fund may make payments ("Service Fees") to
Qualified Recipients, which Service Fees (i) may be paid directly
or through the Distributor or shareholder servicing agent as
disbursing agent and (ii) may not exceed, for any fiscal year of
the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Services Plan are not accruable
or for any fiscal year which is not a full fiscal year), 0.25 of
1% of the average annual net assets of the Fund represented by
the Level Payment Class Shares. Such payments shall be made only
out of the Fund's assets allocable to the Level Payment Class
Shares. The Distributor shall have sole authority with respect to
the selection of any Qualified Recipient or Recipients and the
amount of Service Fees, if any, paid to each Qualified Recipient,
provided that the total Service Fees paid to all Qualified
Recipients may not exceed the amount set forth above and
provided, further, that no Qualified Recipient may receive more
than 0.25 of 1% of the average annual net asset value of shares
sold by such Recipient. The Distributor is authorized, but not
directed, to take into account, in addition to any other factors
deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient and (b) the extent
to which the Qualified Recipient has, at its expense, taken steps
in the shareholder servicing area with respect to holders of
Level Payment Class Shares, including without limitation, any or
all of the following activities: answering customer inquiries
regarding account status and history, and the manner in which
purchases and redemptions of shares of the Fund may be effected;
assisting shareholders in designating and changing dividend
options, account designations and addresses; providing necessary
personnel and facilities to establish and maintain shareholder
accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts; and
providing such other related services as the Distributor or a
shareholder may request from time to time. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years. During the year 1997, the Fund paid $1,653
under the Shareholder Services Plan all of which was retained by
the Distributor.
Provisions for Financial Intermediary Class Shares (Part
II)
As used in Part II of the Services Plan, "Qualified
Recipients" shall mean broker-dealers or others selected by
Aquila Distributors, Inc. (the "Distributor"), including but not
limited to the Distributor and any other principal underwriter of
the Fund, who have, pursuant to written agreements with the Fund
or the Distributor, agreed to provide personal services to
shareholders of Financial Intermediary Class Shares, maintenance
of Financial Intermediary Class Shares shareholder accounts
and/or pursuant to specific agreements entering confirmed
purchase orders on behalf of customers or clients. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all
Financial Intermediary Class Shares beneficially owned by such
Qualified Recipient's customers, clients or other contacts.
"Administrator" shall mean Aquila Management Corporation or any
successor serving as sub-adviser or administrator of the
Fund.
Subject to the direction and control of the Fund's Board
of Trustees, the Fund may make payments ("Service Fees") to
Qualified Recipients, which Service Fees (i) may be paid directly
or through the Distributor or shareholder servicing agent as
disbursing agent and (ii) may not exceed, for any fiscal year of
the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Services Plan are not accruable
or for any fiscal year which is not a full fiscal year), 0.25 of
1% of the average annual net assets of the Fund represented by
the Financial Intermediary Class Shares. Such payments shall be
made only out of the Fund's assets allocable to the Financial
Intermediary Class Shares. The Distributor shall have sole
authority with respect to the selection of any Qualified
Recipient or Recipients and the amount of Service Fees, if any,
paid to each Qualified Recipient, provided that the total Service
Fees paid to all Qualified Recipients may not exceed the amount
set forth above and provided, further, that no Qualified
Recipient may receive more than 0.25 of 1% of the average annual
net asset value of shares sold by such Recipient. The Distributor
is authorized, but not directed, to take into account, in
addition to any other factors deemed relevant by it, the
following: (a) the amount of the Qualified Holdings of the
Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Financial Intermediary
Class Shares, including without limitation, any or all of the
following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; and providing such other related
services as the Distributor or a shareholder may request from
time to time. Notwithstanding the foregoing two sentences, a
majority of the Independent Trustees (as defined below) may
remove any person as a Qualified Recipient. Amounts within the
above limits accrued to a Qualified Recipient but not paid during
a fiscal year may be paid thereafter; if less than the full
amount is accrued to all Qualified Recipients, the difference
will not be carried over to subsequent years. No Class I Shares
were outstanding during the year ended December 31, 1997.
Provisions Relating to Both Parts
While the Services Plan is in effect, the Fund's Distributor
shall report at least quarterly to the Fund's Trustees in writing
for their review on the following matters: (i) all Service Fees
paid under the Services Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor
paid or accrued during such quarter. In addition, if any
Qualified Recipient is an "affiliated person," as that term is
defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), of the Fund, the Adviser, the Administrator or the
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.
The Services Plan has been approved by a vote of the
Trustees, including those Trustees who, at the time of such vote,
were not "interested persons" (as defined in the 1940 Act) of the
Fund and had no direct or indirect financial interest in the
operation of the Services Plan or in any agreements related to
the Services Plan (the "Independent Trustees"), with votes cast
in person at a meeting called for the purpose of voting on the
Services Plan. It will continue in effect for a period of more
than one year from its original effective date only so long as
such continuance is specifically approved at least annually as
set forth in the preceding sentence. It may be amended in like
manner and may be terminated at any time by vote of the
Independent Trustees.
The Services Plan shall also be subject to all applicable
terms and conditions of Rule 18f-3 under the Act as now in force
or hereafter amended.
While the Services Plan is in effect, the selection and
nomination of those Trustees of the Fund who are not "interested
persons" of the Fund, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others
in such selection and nomination if the final decision on any
such selection and nomination is approved by a majority of such
disinterested Trustees.
LIMITATION OF REDEMPTIONS IN KIND
The Fund has elected to be governed by Rule 18f-1 under the
1940 Act, pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1 percent
of the net asset value of the Fund during any 90-day period for
any one shareholder. Should redemptions by any shareholder exceed
such limitation, the Fund will have the option of redeeming the
excess in cash or in kind. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting
the assets into cash. The method of valuing securities used to
make redemptions in kind will be the same as the method of
valuing portfolio securities described under "Net Asset Value Per
Share" in the Prospectus, and such valuation will be made as of
the same time the redemption price is determined.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their affiliations,
if any, with the Administrator or the Distributor and their
principal occupations during at least the past five years are set
forth below. Mr. Herrmann is an "interested person" of the Fund,
as that term is defined in the 1940 Act, as an officer of the
Fund and a Director, officer and shareholder of the Distributor.
Ms. Herrmann is an interested person as a member of his immediate
family. Mr. Dean is an interested person as a trustee of a trust
that owns shares of the parent company of the Adviser. They are
so designated by an asterisk.
As of April 10, 1998, all of the Trustees and officers as
a group owned less than 1% of its outstanding shares.
Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, 380 Madison Avenue, New York, New York 10017
Founder, President and Chairman of the Board of Aquila
Management Corporation since 1984, the sponsoring organization
and Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Hawaiian Tax-Free Trust since
1984; Tax-Free Trust of Arizona since 1986; Tax-Free Trust of
Oregon since 1986; Tax-Free Fund of Colorado since 1987; Tax-Free
Fund For Utah since 1992; and Narragansett Insured Tax-Free
Income Fund since 1992; each of which is a tax-free municipal
bond fund, and two equity funds, Aquila Rocky Mountain Equity
Fund since 1993 and Aquila Cascadia Equity Fund, since 1996,
which, together with this Fund are called the Aquila Bond and
Equity Funds; and Pacific Capital Cash Assets Trust since 1984;
Churchill Cash Reserves Trust since 1985; Pacific Capital U.S.
Government Securities Cash Assets Trust since 1988; Pacific
Capital Tax-Free Cash Assets Trust since 1988; each of which is a
money market fund, and together with Capital Cash Management
Trust ("CCMT") are called the Aquila Money-Market Funds; Vice
President, Director, Secretary and formerly Treasurer of Aquila
Distributors, Inc. since 1981, distributor of the above funds;
President and Chairman of the Board of Trustees of CCMT, a money
market fund since 1981, and an Officer and Trustee/Director of
its predecessors since 1974; Chairman of the Board of Trustees
and President of Prime Cash Fund (which is inactive), since 1982
and of Short Term Asset Reserves 1984-1996; President and a
Director of STCM Management Company, Inc., sponsor and
sub-adviser to CCMT; Chairman, President, and a Director since
1984, of InCap Management Corporation, formerly sub-adviser and
administrator of Prime Cash Fund and Short Term Asset Reserves,
and Founder and Chairman of several other money market funds;
Director or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest
Global Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and
Trustee of Quest For Value Accumulation Trust, The Saratoga
Advantage Trust, and of the Rochester Group of Funds, each of
which is an open-end investment company; Trustee of Brown
University, 1990-1996 and currently Trustee Emeritus; actively
involved for many years in leadership roles with university,
school and charitable organizations.
Thomas A. Christopher, Trustee, 459 West Green Street, Danville,
Kentucky 40422
Shareholder of Robinson, Hughes & Christopher, C.P.A.s, P.S.C.,
since 1977; President of A Good Place for Fun, Inc., a sports
facility, since 1987; active member of the American Institute of
Certified Public Accountants; Board of Directors of the Kentucky
Society of CPAs 1991 to 1994; Trustee of Churchill Cash Reserves
Trust since 1985; presently active in leadership roles with
various civic, community and church organizations.
Douglas Dean*, Trustee, 106 West Vine Street, Suite 600,
Lexington, Kentucky 40507
Founder and President of Dean, Dorton & Ford P.S.C., a public
accounting firm, since 1979; previously Staff Accountant, Tax
Supervisor and Tax Manager with Coopers & Lybrand, a public
accounting firm; Trustee of Trent Equity Fund, an equity mutual
fund, 1992-1994; Trustee of Churchill Cash Reserves Trust since
1995; Active as an officer and board member of various charitable
and community organizations.
Diana P. Herrmann*, Trustee and Vice President, 380 Madison
Avenue, New York, New York 10017
Senior Vice President and Secretary and formerly Vice
President of the Administrator since 1986 and Director since
1984; Trustee of Tax-Free Trust of Arizona and Tax-Free Trust of
Oregon since 1994, of Churchill Cash Reserves Trust since 1995
and of Aquila Cascadia Equity Fund since 1996; Vice President of
InCap Management Corporation since 1986 and Director since 1983;
Senior Vice President or Vice President and formerly Assistant
Vice President of the Money Funds since 1986; Vice-President of
Prime Cash Fund (which is inactive), since 1986, of Cascades Cash
Fund 1989-1994, and of Short Term Asset Management Fund,
1986-1988; Assistant Vice President of Oxford Cash Management
Fund, 1986-1988; Assistant Vice President and formerly Loan
Officer of European American Bank, 1981-1986; daughter of the
Fund's President; Trustee of the Leopold Schepp Foundation
(academic scholarships) since 1995; actively involved in mutual
fund and trade associations and in college and other volunteer
organizations.
Theodore T. Mason, Trustee, 26 Circle Drive, Hastings-on-Hudson,
New York 10706
Managing Director of EastWind Power Partners, Ltd. since 1994;
Second Vice President, Alumni Association, SUNY Maritime College
1998; Director for the same organization, 1997; Director of
Cogeneration Development of Willamette Industries, Inc., a forest
products company, 1991-1993; Vice President of Corporate
Development of Penntech Papers, Inc., 1978-1991; Vice President
of Capital Projects for the same company, 1977-1978; Vice
Chairman of the Board of Trustees of CCMT since 1981; Trustee and
Vice President, 1976-1981, and formerly Director of its
predecessor; Director of STCM Management Company, Inc.; Vice
Chairman of the Board of Trustees and Trustee of Prime Cash Fund
(which is inactive) since 1982; Trustee of Short Term Asset
Reserves, 1984-1986 and 1989-1996, of Hawaiian Tax-Free Trust and
Pacific Capital Cash Assets Trust since 1984, of Churchill Cash
Reserves Trust since 1985 and of Pacific Capital Tax-Free Cash
Assets Trust and Pacific Capital U.S. Government Securities Cash
Assets Trust since 1988; Vice President and Trustee of Oxford
Cash Management Fund, 1983-1989; Vice President of Trinity Liquid
Assets Trust, 1983-1985; President and Director of Ted Mason
Venture Associates, Inc., a venture capital consulting firm,
1972-1980; Advisor to the Commander, U.S. Maritime Defense Zone
Atlantic, 1984-1988; National Vice President, Surface/Subsurface,
Naval Reserve Association, 1985-1987; National Vice President,
Budget and Finance, for the same Association, 1983-1985;
Commanding Officer of four Naval Reserve Units, 1974-1985;
Captain, USNR, 1978-1988.
Anne J. Mills, Trustee, 167 Glengarry Place, Castle Pines
Village, Castle Rock, Colorado 80104
Vice President for Business Affairs of Ottawa University since
1992; Director of Customer Fulfillment, U.S. Marketing and
Services Group, IBM Corporation, 1990-1991; Director of Business
Requirements of that Group, 1988-1990; Director of Phase
Management of that Group, 1985-1988; Budget Review Officer of the
American Baptist Churches/USA 1994-1997; Director of the
American Baptist Foundation 1985-1996 and since 1998; Trustee of
Brown University; Trustee of Churchill Cash Reserves Trust since
1985, of Tax-Free Trust of Arizona since 1986, of Tax-Free Fund
of Colorado and Capital Cash Management Trust since 1987 and of
Tax-Free Fund For Utah since 1994.
William J. Nightingale, Trustee, 1266 East Main Street, Stamford
Connecticut 06902
Chairman and founder (1975) and Senior Advisor since 1995 of
Nightingale & Associates, L.L.C., a general management consulting
firm focusing on interim management, divestitures, turnaround of
troubled companies, corporate restructuring and financial
advisory services; President, Chief Executive Officer and
Director of Bali Company, Inc., a manufacturer of women's
apparel, which became a subsidiary of Hanes Corporation,
1970-1975; prior to that, Vice President and Chief Financial
Officer of Hanes Corporation after being Vice President-Corporate
Development and Planning of that company, 1968-1970; formerly
Senior Associate of Booz, Allen & Hamilton, management
consultants, after having been Marketing Manager with General
Mills, Inc.; Trustee of Narragansett Insured Tax-Free Income Fund
since 1992 and of Churchill Cash Reserves Trust since 1993;
Director of Kasper A.S.L.Ltd; The Leslie Fay Company, Inc;
and Ring's End, Inc.
James R. Ramsey, Trustee, 109 Wetherby Building, Western Kentucky
University, Bowling Green, Kentucky 42101
Vice President for Finance and Administration, and Professor of
Economics, Western Kentucky University; Trustee of Churchill Cash
Reserves Trust since 1995; Chief State Economist and Executive
Director of the Office for Financial Management and Economic
Analysis of the Commonwealth of Kentucky, 1981-1992; Adjunct
Professor of the University of Kentucky; Assistant Dean and
Director of Public Administration of Loyola University in New
Orleans, Louisiana, 1978-1981; Assistant Professor of Public
Finance and Administration of Loyola University, 1977-1981;
Assistant Professor of Economics, Middle Tennessee State
University, 1975-1977; published numerous articles, monographs
and working papers on economics and fiscal management.
Jerry G. McGrew, Senior Vice President, P.O. Box 662, Radcliff,
Kentucky 40159
Vice President, 1987-1994; Vice President of Tax-Free Fund For
Utah since 1992; Vice President of Churchill Cash Reserves Trust
since 1995; Registered Principal since 1993; Vice President of
Aquila Distributors, Inc. since 1993; Registered Representative
of J.J.B. Hilliard, W.L. Lyons Inc., 1983-1987; Account Manager
with IBM Corporation, 1967-1981; Gubernatorial appointee,
Kentucky Financial Institutions Board, since 1993; Chairman,
Total Quality Management for Small Business, 1990-1994; President
of Elizabethtown/Hardin County, Kentucky, Chamber of Commerce,
1989-1991; President of Elizabethtown Country Club, 1983-1985.
William C. Wallace, Vice President, 380 Madison Avenue, New York,
New York 10017
Vice President of Capital Cash Management Trust and Pacific
Capital Cash Assets Trust since 1984; Senior Vice President of
Hawaiian Tax-Free Trust since 1985 and Vice President, 1984-1985;
Senior Vice President of Tax-Free Trust of Arizona since 1989 and
Vice President, 1986-1988; Vice President of Tax-Free Trust of
Oregon since 1986, of Tax-Free Fund of Colorado since 1987, of
Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital
U.S. Government Securities Cash Assets Trust since 1988 and of
Narragansett Insured Tax-Free Income Fund since 1992; Secretary
and Director of STCM Management Company, Inc. since 1974;
President of the Distributor since 1995 and formerly Vice
President of the Distributor, 1986-1992; Member of the Panel of
Arbitrators, American Arbitration Association, since 1978;
Assistant Vice President, American Stock Exchange, Market
Development Division, and Director of Marketing, American Gold
Coin Exchange, a subsidiary of the American Stock Exchange,
1976-1984.
Teresa M. Priest, Vice President, 402 North Mantle Avenue,
Elizabethtown, KY 42701
Corporate Safety Director/Human Resource Manager of Ramsey &
Associates, Inc. 1995-1996; Senior Sales Representative of
Bluegrass Cellular, Inc. 1993-1995; Account Executive at Lite
105.5 WASE, 1992; Sales Assistant of J.J.B. Hilliard, W.L. Lyons,
Inc. 1990-1991.
L. Michele Robbins, Vice President, 4277 Bardstown Road,
Elizabethtown, Kentucky 42701
Assistant Vice President, 1995-1996; Registered Representative of
Aquila Distributors, Inc. since 1995; Investment Broker,
1990-1994; Sales Assistant, 1984-1990, J.J.B. Hilliard, W.L.
Lyons, Inc.; active in Elizabethtown Emmaus Community, United Way
of Hardin County, Elizabethtown Junior Women's Club, Big
Brothers/Big Sisters, and Fund for the Arts.
Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017
Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer
of Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of
the Distributor since 1985.
Richard F. West, Treasurer, 380 Madison Avenue, New York, New
York 10017
Treasurer of the Aquila Money-Market Funds and the Aquila Bond
and Equity Funds and of Aquila Distributors, Inc. since 1992;
Associate Director of Furman Selz Incorporated, 1991-1992; Vice
President of Scudder, Stevens & Clark, Inc. and Treasurer of
Scudder Institutional Funds, 1989-1991; Vice President of Lazard
Freres Institutional Funds Group, Treasurer of Lazard Freres
Group of Investment Companies and HT Insight Funds, Inc.,
1986-1988; Vice President of Lehman Management Co., Inc. and
Assistant Treasurer of Lehman Money Market Funds, 1981-1985;
Controller of Seligman Group of Investment Companies, 1960-1980.
Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New
York 10176
Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust,
1982-1985 and Trustee of that Trust, 1985-1986; Secretary of
Oxford Cash Management Fund, 1982-1988.
John M. Herndon, Assistant Secretary, 380 Madison Avenue, New
York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995 and Vice President of the
Aquila Money-Market Funds since 1990; Vice President of the
Administrator since 1990; Investment Services Consultant and Bank
Services Executive of Wright Investors' Service, a registered
investment adviser, 1983-1989; Member of the American Finance
Association, the Western Finance Association and the Society of
Quantitative Analysts.
Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017
Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995; Counsel to the
Administrator and the Distributor since 1995; Secretary of the
Distributor since 1997; formerly a Legal Associate for
Oppenheimer Management Corporation, 1993-1995.
Compensation of Trustees
The Fund does not pay fees to Trustees affiliated with
the Administrator or to any of the Fund's officers. During the
fiscal year ended December 31, 1997, the Fund paid $72,402 in
fees and reimbursement of expenses to its other Trustees. The
Fund is one of the 14 funds in the Aquilasm Group of Funds, which
consist of tax-free municipal bond funds, money market funds and
two equity funds. The following table lists the compensation of
all Trustees who received compensation from the Fund and the
compensation they received during the Fund's fiscal year from
other funds in the Aquilasm Group of Funds. None of such Trustees
has any pension or retirement benefits from the Fund or any of
the other funds in the Aquila group.
<TABLE>
<CAPTION>
Compensation Number of
from all boards on
Compensation funds in the which the
from the Aquilasm Trustee
Name Fund Group serves
<S> <C> <C> <C>
Thomas A.
Christopher $10,179 $16,899 2
Douglas
Dean $6,948 $13,141 2
Theodore T.
Mason $8,500 $52,279 7
Anne J.
Mills $7,404 $39,424 6
William J.
Nightingale $7,948 $17,931 3
James R.
Ramsey $7,885 $13,620 2
</TABLE>
ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS
On April 24, 1998, the management arrangements described
below were approved by the Fund's shareholders and will go into
effect on May 1, 1998. The new arrangements are designed to
change the form of the Fund's investment advisory and
administration arrangements to a new structure involving an
adviser and a sub-adviser. The new arrangements do not result in
any change in overall management fees paid by the Fund, nor any
change in the parties providing these services. Marketing efforts
and positioning of the Fund will remain the same with a strong
local niche orientation.
Under the new arrangements, Aquila Management Corporation
("Aquila"), which since inception of the Fund has served as the
Fund's administrator, in addition becomes investment adviser
under a new agreement (the "Advisory and Administration
Agreement") under which it also continues to provide the Fund
with all administrative services. Also, by adoption of a
Sub-Advisory Agreement between Aquila and Banc One Investment
Advisors Corporation ("the Sub-Adviser"), the former investment
advisory agreement is replaced by one under which Aquila appoints
the Sub-Adviser as Sub-Adviser to the Fund. Under the
Sub-Advisory Agreement, the Sub-Adviser will continue to provide
the Fund with advisory services of the kind which it formerly
provided as adviser. The duties of the administrator, previously
performed under an administration agreement, are now performed by
Aquila under the Advisory and Administration Agreement where
Aquila is referred to as the "Manager." The former administration
agreement terminates upon effectiveness of the new
agreements.
Additional Information as to the Investment Advisory and
Administration Agreement
The Advisory and Administration Agreement provides that
it will become effective on May 1, 1998 and will, unless
terminated as thereinafter provided, continue in effect until the
December 31 next preceding the first anniversary of the effective
date of the Advisory and Administration Agreement, and from year
to year thereafter, but only so long as such continuance is
specifically approved at least annually (1) by a vote of the
Fund's Board of Trustees, including a vote of a majority of the
Trustees who are not parties to the Advisory and Administration
Agreement or "interested persons" (as defined in the Act) of any
such party, with votes cast in person at a meeting called for the
purpose of voting on such approval, or (2) by a vote of the
holders of a "majority" (as so defined) of the outstanding voting
securities of the Fund and by such a vote of the Trustees.
During the fiscal year ended December 31, 1997, the Fund
paid or accrued $599,081 to the Manager under the former
administration agreements then in effect. During the fiscal year
ended December 31, 1996 the Fund paid or accrued $587,239 to the
Manager under the administration agreement then in effect. During
the year ended December 31, 1995, fees of $515,895 were paid or
accrued to the Manager under a former administration agreement in
effect until September 10, 1995 and under another administration
Agreement in effect thereafter.
Additional Information as to the Sub-Advisory Agreement
The Sub-Advisory Agreement provides that any investment
program furnished by the Sub-Adviser shall at all times conform
to, and be in accordance with, any requirements imposed by: (1)
the Investment Company Act of 1940 (the "Act") and any rules or
regulations in force thereunder; (2) any other applicable laws,
rules and regulations; (3) the Declaration of Trust and By-Laws
of the Fund as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its
registration statement under the Act or as amended by the
shareholders of the Fund.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall give to the Manager, as defined therein, and to the Fund
the benefit of its best judgment and effort in rendering services
hereunder, but the Sub-Adviser shall not be liable for any loss
sustained by reason of the adoption of any investment policy or
the purchase, sale or retention of any security, whether or not
such purchase, sale or retention shall have been based upon (i)
its own investigation and research or (ii) investigation and
research made by any other individual, firm or corporation, if
such purchase, sale or retention shall have been made and such
other individual, firm or corporation shall have been selected in
good faith by the Sub-Adviser. Nothing therein contained shall,
however, be construed to protect the Sub-Adviser against any
liability to the Fund or its security holders by reason of
willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard
of its obligations and duties under the Agreement.
The Sub-Advisory Agreement provides that nothing in it
shall prevent the Sub-Adviser or any affiliated person (as
defined in the Act) of the Sub-Adviser from acting as investment
adviser or manager for any other person, firm or corporation and
shall not in any way limit or restrict the Sub-Adviser or any
such affiliated person from buying, selling or trading any
securities for its own or their own accounts or for the accounts
of others for whom it or they may be acting, provided, however,
that the Sub-Adviser expressly represents that, while acting as
Sub-Adviser, it will undertake no activities which, in its
judgment, will adversely affect the performance of its
obligations to the Fund under the Agreement. It is agreed that
the Sub-Adviser shall have no responsibility or liability for the
accuracy or completeness of the Fund's Registration Statement
under the Act and the Securities Act of 1933, except for
information supplied by the Sub-Adviser for inclusion therein.
The Sub-Adviser shall promptly inform the Fund as to any
information concerning the Sub-Adviser appropriate for inclusion
in such Registration Statement, or as to any transaction or
proposed transaction which might result in an assignment (as
defined in the Act) of the Agreement. To the extent that the
Manager is indemnified under the Fund's Declaration of Trust with
respect to the services provided hereunder by the Sub-Adviser,
the Manager agrees to provide the Sub-Adviser the benefits of
such indemnification.
The Sub-Advisory Agreement provides that in connection
with its duties to arrange for the purchase and sale of the
Fund's portfolio securities, the Sub-Adviser shall select such
broker-dealers ("dealers") as shall, in the Sub-Adviser's
judgment, implement the policy of the Fund to achieve "best
execution," i.e., prompt, efficient, and reliable execution of
orders at the most favorable net price. The Sub-Adviser shall
cause the Fund to deal directly with the selling or purchasing
principal or market maker without incurring brokerage commissions
unless the Sub-Adviser determines that better price or execution
may be obtained by paying such commissions; the Fund expects that
most transactions will be principal transactions at net prices
and that the Fund will incur little or no brokerage costs. The
Fund understands that purchases from underwriters include a
commission or concession paid by the issuer to the underwriter
and that principal transactions placed through dealers include a
spread between the bid and asked prices. In allocating
transactions to dealers, the Sub-Adviser is authorized to
consider, in determining whether a particular dealer will provide
best execution, the dealer's reliability, integrity, financial
condition and risk in positioning the securities involved, as
well as the difficulty of the transaction in question, and thus
need not pay the lowest spread or commission available if the
Sub-Adviser determines in good faith that the amount of
commission is reasonable in relation to the value of the
brokerage and research services provided by the dealer, viewed
either in terms of the particular transaction or the
Sub-Adviser's overall responsibilities. If, on the foregoing
basis, the transaction in question could be allocated to two or
more dealers, the Sub-Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the Fund. Such research may be in
written form or through direct contact with individuals and may
include quotations on portfolio securities and information on
particular issuers and industries, as well as on market,
economic, or institutional activities. The Fund recognizes that
no dollar value can be placed on such research services or on
execution services and that such research services may or may not
be useful to the Fund and may be used for the benefit of the
Sub-Adviser or its other clients.
During the fiscal years ended December 31, 1997, 1996 and
1995, all of the Fund's transactions were principal transactions
and no brokerage commissions were paid.
The Sub-Advisory Agreement provides that the Sub-Adviser
agrees to maintain, and to preserve for the periods prescribed,
such books and records with respect to the portfolio transactions
of the Fund as are required by applicable law and regulation, and
agrees that all records which it maintains for the Fund on behalf
of the Manager shall be the property of the Fund and shall be
surrendered promptly to the Fund or the Manager upon request. The
Sub-Adviser agrees to furnish to the Manager and to the Board of
Trustees of the Fund such periodic and special reports as each
may reasonably request.
The Sub-Advisory Agreement provides that the Sub-Adviser
shall bear all of the expenses it incurs in fulfilling its
obligations under the Agreement. In particular, but without
limiting the generality of the foregoing: the Sub-Adviser shall
furnish the Fund, at the Sub-Adviser's expense, all office space,
facilities, equipment and clerical personnel necessary for
carrying out its duties under the Agreement. The Sub-Adviser
shall supply, or cause to be supplied, to any investment adviser,
administrator or principal underwriter of the Fund all necessary
financial information in connection with such adviser's,
administrator's or principal underwriter's duties under any
agreement between such adviser, administrator or principal
underwriter and the Fund. The Sub-Adviser will also pay all
compensation of the Fund's officers, employees, and Trustees, if
any, who are affiliated persons of the Sub-Adviser.
The Sub-Advisory Agreement provides that it will becomes
effective on May 1, 1998 and shall, unless terminated as
thereinafter provided, continue in effect until the June 30 next
preceding the first anniversary of the effective date of the
Agreement, and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually (1)
by a vote of the Fund's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to the Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities
of the Fund and by such a vote of the Trustees.
The Sub-Advisory Agreement provides that it may be
terminated by the Sub-Adviser at any time without penalty upon
giving the Manager and the Fund sixty days' written notice (which
notice may be waived). It may be terminated by the Manager or the
Fund at any time without penalty upon giving the Sub-Adviser
sixty days' written notice (which notice may be waived by the
Sub-Adviser), provided that such termination by the Fund shall be
directed or approved by a vote of a majority of its Trustees in
office at the time or by a vote of the holders of a majority (as
defined in the Act) of the voting securities of the Fund
outstanding and entitled to vote. The Sub-Advisory Agreement will
automatically terminate in the event of its assignment (as
defined in the Act) or the termination of the Investment Advisory
Agreement. The Sub-Adviser agrees that it will not exercise its
termination rights for at least three years from the effective
date of the Agreement, except for regulatory reasons.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment
Company Institute v. Camp that the federal statute commonly
referred to as the Glass-Steagall Act prohibits a national bank
from operating a fund for the collective investment of managing
agency accounts. Subsequently, the Board of Governors of the
Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such
decision: (a) forbid a bank holding company registered under the
Federal Bank Holding Company Act of 1956 (the "Holding Company
Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment
company continuously engaged in the issuance of its Shares, but
(b) do not prohibit such a holding company or affiliate from
acting as investment adviser, transfer agent, and custodian to
such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its
authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies
and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies. In the Board of
Governors case, the Supreme Court also stated that if a national
bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies
and their non-bank affiliates to act as investment advisers to
investment companies, a national bank performing investment
advisory services for an investment company would not violate the
Glass-Steagall Act. In addition, state securities laws on this
issue may differ from the interpretations of federal law
expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
The Sub-Adviser has represented to the Fund that it
possesses the legal authority to perform the investment advisory
services contemplated by the agreement and described in the
Prospectus and the Additional Statement without violation of
applicable statutes and regulations. Future changes in either
federal or state statutes and regulations relating to the
permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further
judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent or
restrict the Sub-Adviser from continuing to perform such services
for the Fund. Depending upon the nature of any changes in the
services which could be provided by the Sub-Adviser, the Board of
Trustees of the Fund would review the Fund's relationship with
the Sub-Adviser and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative
action prohibit or restrict the proposed activities of BANC ONE
CORPORATION subsidiary banks or their correspondent banks in
connection with customer purchases of shares of the Fund, these
banks might be required to alter materially or discontinue the
services offered by them to customers. It is not anticipated,
however, that any change in the Fund's method of operations would
affect its net asset value per share or result in financial
losses to any customer.
During the fiscal year ended December 31, 1997, the Fund
accrued in fees to the Sub-Adviser under the advisory agreement
then in effect of $322,582. During the fiscal year ended December
31, 1996 the Fund paid or accrued $316,432 to the Sub-Adviser
under the advisory agreement then in effect. From January 1,
1995, through September 10, 1995, the Fund paid or accrued
$336,044 in advisory fees to its former adviser under a former
advisory agreement. From September 11, 1995 through December 31,
1995 the Fund paid or accrued $102,734 in advisory fees to the
Sub-Adviser under the advisory agreement then in effect.
COMPUTATION OF NET ASSET VALUE
The net asset value of each class of the Fund's shares is
determined as of 4:00 p.m., New York time, on each day that the
New York Stock Exchange is open by dividing the value of the
Fund's net assets attributable to that class by the total number
of shares of the class then outstanding. Securities having a
remaining maturity of less than sixty days when purchased and
securities originally purchased with maturities in excess of
sixty days but which currently have maturities of sixty days or
less are valued at cost adjusted for amortization of premiums and
accretion of discounts. All other portfolio securities are valued
at the mean between bid and asked quotations which, for Kentucky
Obligations, may be obtained from a reputable pricing service or
from one or more broker-dealers dealing in Kentucky Obligations,
either of which may, in turn, obtain quotations from
broker-dealers or banks which deal in specific issues. However,
since Kentucky Obligations are ordinarily purchased and sold on a
"yield" basis by banks or dealers which act for their own account
and do not ordinarily make continuous offerings, quotations
obtained from such sources may be subject to greater fluctuations
than is warranted by prevailing market conditions. Accordingly,
some or all of the Kentucky Obligations in the Fund's portfolio
may be priced, with the approval of the Fund's Board of Trustees,
by differential comparisons to the market in other municipal
bonds under methods which include consideration of the current
market value of tax-free debt instruments having varying
characteristics of quality, yield and maturity. Any securities or
assets for which market quotations are not readily available are
valued at their fair value as determined in good faith under
procedures established by and under the general supervision and
responsibility of the Fund's Board of Trustees. In the case of
Kentucky Obligations, such procedures may include "matrix"
comparisons to the prices for other tax-free debt instruments on
the basis of the comparability of their quality, yield, maturity
and other special factors, if any, involved. With the approval of
the Fund's Board of Trustees, the Adviser may at its own expense
and without reimbursement from the Fund employ a pricing service,
bank or broker-dealer experienced in such matters to perform any
of the above described functions.
As indicated above, the net asset value per share of the
Fund's shares will be determined on each day that the New York
Stock Exchange is open. That Exchange annually announces the days
on which it will not be open. The most recent announcement
indicates that it will not be open on the following days: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, that Exchange may close on days not
included in that announcement.
Reasons for Differences in Public Offering Price
As described herein and in the Prospectus, there are a
number of instances in which the Fund's Class A Shares are sold
or issued on a basis other than the maximum public offering
price, that is, the net asset value plus the highest sales
charge. Some of these relate to lower or eliminated sales charges
for larger purchases, whether made at one time or over a period
of time as under a Letter of Intent or right of accumulation.
(See the table of sales charges in the Prospectus.) The reasons
for these quantity discounts are, in general, that (i) they are
traditional and have long been permitted in the industry and are
therefore necessary to meet competition as to sales of shares of
other funds having such discounts; and (ii) they are designed to
avoid an unduly large dollar amount of sales charge on
substantial purchases in view of reduced selling expenses.
Quantity discounts are made available to certain related persons
("single purchasers") for reasons of family unity and to provide
a benefit to tax-exempt plans and organizations.
The reasons for the other instances in which there are
reduced or eliminated sales charges for Class A Shares are as
follows. Exchanges at net asset value are permitted because a
sales charge has already been paid on the shares exchanged. Sales
without sales charge are permitted to Trustees, officers and
certain others due to reduced or eliminated selling expenses
and/or since such sales may encourage incentive, responsibility
and interest and an identification with the aims and policies of
the Fund. Limited reinvestments of redemptions of Class A Shares
and Class C Shares at no sales charge are permitted to attempt to
protect against mistaken or incompletely informed redemption
decisions. Shares may be issued at no sales charge in plans of
reorganization due to reduced or eliminated sales expenses and
since, in some cases, such issuance is exempted in the 1940 Act
from the otherwise applicable restrictions as to what sales
charge must be imposed. In no case in which there is a reduced or
eliminated sales charge are the interests of existing
shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or
issued.
AUTOMATIC WITHDRAWAL PLAN
If you own or purchase Class A Shares or Class Y Shares
(Plan only available to shareholders with Class Y accounts on
April 30, 1998) of the Fund having a net asset value of at least
$5,000 you may establish an Automatic Withdrawal Plan under which
you will receive a monthly or quarterly check in a stated amount,
not less than $50. Stock certificates will not be issued for
shares held under an Automatic Withdrawal Plan. All dividends and
distributions must be reinvested. Shares will be redeemed on the
last business day of the month or quarter as may be necessary to
meet withdrawal payments.
Redemption of shares for withdrawal purposes may reduce
or even liquidate your account. The monthly or quarterly payments
paid to you may not be considered as a yield or income on
investment.
ADDITIONAL TAX INFORMATION
If you incur a sales commission on purchase of shares of one
mutual fund (the original fund) and then sell such shares or
exchange them for shares of a different mutual fund without
having held them at least 91 days, you must reduce the tax basis
for the shares sold or exchanged to the extent that the standard
sales commission charged for acquiring shares in the exchange or
later acquiring shares of the original fund or another fund is
reduced because of the shareholder's having owned the original
fund shares. The effect of the rule is to increase your gain or
reduce your loss on the original fund shares. The amount of the
basis reduction on the original fund shares, however, is added on
the investor's basis for the fund shares acquired in the exchange
or later acquired. The provision applies to commissions charged
after October 3, 1989.
CONVERSION OF CLASS C SHARES
Level Payment Class Shares ("Class C Shares") of the Fund,
which you hold will automatically convert to Front Payment Class
Shares ("Class A Shares") of the Fund based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the
sixth anniversary of the your initial purchase of such Class C
Shares occurs. For these purposes, the date of your initial
purchase shall mean (1) the first business day of the month in
which such Class C Shares were issued to you, or (2) for Class C
Shares of the Fund you have obtained through an exchange or
series of exchanges under the Exchange Privilege (see "Exchange
Privilege" in the Prospectus), the first business day of the
month in which you made the original purchase of Class C Shares
so exchanged. For conversion purposes, Class C Shares purchased
through reinvestment of dividends or other distributions paid in
respect of Class C Shares will be held in a separate sub-account.
Each time any Class C Shares in your regular account (other than
those in the sub-account) convert to Class A Shares, a pro-rata
portion of the Class C Shares in the sub-account will also
convert to Class A Shares. The portion will be determined by the
ratio that your Class C Shares then converting to Class A Shares
bears to the total of your Class C Shares not acquired through
reinvestment of dividends and distributions.
The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the
dividends and other distributions paid on Class A Shares and
Class C Shares will not result in "preferential dividends" under
the Code; and (2) the conversion of shares does not constitute a
taxable event. If the conversion feature ceased to be available,
the Class C Shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the
Class C Shares beyond six years from the date of purchase. The
Fund has no reason to believe that these conditions for the
availability of the conversion feature will not continue to be
met.
If the Fund implements any amendments to its Distribution
Plan that would increase materially the costs that may be borne
under such Distribution Plan by Class A Shares shareholders,
Class C Shares will stop converting into Class A Shares unless a
majority of Class C Shares shareholders, voting separately as a
class, approve the proposal.
GENERAL INFORMATION
Possible Additional Series
If additional Series (as discussed in the Prospectus) were
created by the Board of Trustees, shares of each such Series
would be entitled to vote as a Series only to the extent
permitted by the 1940 Act (see below) or as permitted by the
Board of Trustees. Income and operating expenses would be
allocated among two or more series in a manner acceptable to the
Board of Trustees.
Under Rule 18f-2 under the 1940 Act, as to any investment
company which has two or more Series outstanding, on any matter
required to be submitted to shareholder vote, such matter is not
deemed to have been effectively acted upon unless approved by the
holders of a "majority" (as defined in that Rule) of the voting
securities of each Series affected by the matter. Such separate
voting requirements do not apply to the election of trustees or
the ratification of the selection of accountants. The Rule
contains special provisions for cases in which an advisory
contract is approved by one or more, but not all, Series. A
change in investment policy may go into effect as to one or more
Series whose holders so approve the change, even though the
required vote is not obtained as to the holders of other affected
Series.
Ownership of Securities
Of the shares of the Fund outstanding on April 7, 1998,
BHC Securities Inc., 2005 Market Street, Philadelphia, PA held of
record 1,473,553 Class A Shares (7.1% of the class) and 13,968
Class C Shares (17% of the class); J.C.Bradford & Co., 330
Commerce Street, Nashville, TN held of record 10,059 Class C
Shares (12.2% of the class); Merrill Lynch Pierce Fenner & Smith
held of record 5,612 Class C Shares (6.8% of the Class); and Dean
Witter, P.O. Box 250, Church Street Station, New York, NY held of
record 6,478 Class C Shares (7.9% of the class). On the basis of
information received from those holders, the Fund's management
believes that all of such shares are held for the benefit of
clients.
Of the Class C Shares of the Fund outstanding on April 7,
1998, John K. Codey held of record 10,017 shares (12.2% of the
class); Mary Lois Koonce held of record 6,916 shares (8.4% of the
class) and R Hatcher and P Hatcher JTWROS held of record 8,570
shares (10.4% of the class).
Of the Class Y Shares of the Fund outstanding on April 7,
1998, National City Bank of Kentucky, P.O. Box 94984, Cleveland
Ohio, TTEE. held of record 343,914 shares (32.9% of the class).
On the basis of information received from the holder, the Fund's
management believes that all of such shares are held for the
benefit of clients.
The Fund's management is not aware of any other person
owning of record or beneficially 5% or more of the shares of any
class of Fund's outstanding shares as of that date.
Indemnification of Shareholders and Trustees
Under Massachusetts law, shareholders of a trust such as the
Fund may, under certain circumstances, be held personally liable
as partners for the obligations of the Fund. For shareholder
protection, however, an express disclaimer of shareholder
liability for acts or obligations of the Fund is contained in the
Declaration of Trust which requires that notice of such
disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees. The
Declaration of Trust provides for indemnification out of the
Fund's property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides
that the Fund shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to the relatively remote circumstances in
which the Fund itself would be unable to meet its obligations. In
the event the Fund had two or more Series, and if any such Series
were to be unable to meet the obligations attributable to it
(which, as is the case with the Fund, is relatively remote), the
other Series would be subject to such obligations, with
corresponding increase in the risk of the shareholder liability
mentioned in the prior sentence.
The Declaration of Trust further indemnifies the Trustees of
the Fund out of the property of the Fund and provides that they
will not be liable for errors of judgment or mistakes of fact or
law; but nothing in the Declaration of Trust protects a Trustee
against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his or her office.
Custodian and Auditors
The Fund's Custodian, Bank One Trust Company is responsible
for holding the Fund's assets. The Custodian is an affiliate of
the Adviser.
The Fund's auditors, KPMG Peat Marwick LLP, perform an
annual audit of the Fund's financial statements.
Underwriting Commissions
During the year ended December 31, 1997 the aggregate
dollar amount of sales charges on sales of shares in the Fund was
$451,516 and the amount retained by the Distributor was
$37,896.
Financial Statements
The financial statements for the Fund for the fiscal year
ended December 31, 1997, which are contained in the Annual Report
for that fiscal year, are hereby incorporated by reference into
the Additional Statement. Those financial statements have been
audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon is incorporated herein by reference.
<PAGE>
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
Municipal Bond Ratings
Standard & Poor's. A Standard & Poor's municipal obligation
rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment
may take into consideration obligors such as guarantors, insurers
or lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization
or other arrangement under the laws of bankruptcy and
other laws affecting creditors rights.
AAA Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest
and repay principal although it is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category
than in higher rated categories.
Plus (+) or Minus (:): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the
rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the debt
being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.
Standard & Poor's ratings for municipal note issues are
designated SP in order to help investors distinguish more clearly
the credit quality of notes as compared to bonds. Notes bearing
the designation SP-1 are deemed very strong or to have strong
capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a
plus (+) designation. Notes bearing the designation SP-2 are
deemed to have a satisfactory capacity to pay principal and
interest.
Moody's Investors Service. A brief description of the
applicable Moody's Investors Service rating symbols and their
meanings follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure.
While the various protective elements are likely to
change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium
grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Moody's Short Term Loan Ratings - There are four rating
categories for short-term obligations, all of which define an
investment grade situation. These are designated Moody's
Investment Grade as MIG 1 through MIG 4. In the case of variable
rate demand obligations (VRDOs), two ratings are assigned; one
representing an evaluation of the degree of risk associated with
scheduled principal and interest payments, and the other
representing an evaluation of the degree of risk associated with
the demand feature. The short-term rating assigned to the demand
feature of VRDOs is designated as VMIG. When no rating is applied
to the long or short-term aspect of a VRDO, it will be designated
NR. Issues or the features associated with MIG or VMIG ratings
are identified by date of issue, date of maturity or maturities
or rating expiration date and description to distinguish each
rating from other ratings. Each rating designation is unique with
no implication as to any other similar issue of the same obligor.
MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issuer's
specific structural or credit features.
MIG1/VMIG1 This designation denotes best quality. There
is present strong protection by established
cash flows, superior liquidity support or
demonstrated broad-based access to the market
for refinancing.
MIG2/VMIG2 This designation denotes high quality.
Margins of protection are ample although not
so large as in the preceding group.
MIG3/VMIG3 This designation denotes favorable quality.
All security elements are accounted for but
there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow
protection may be narrow and market access
for refinancing is likely to be less well
established.
MIG4/VMIG4 This designation denotes adequate quality.
Protection commonly regarded as required of
an investment security is present and
although not distinctly or predominantly
speculative, there is specific risk.
<PAGE>
INVESTMENT ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey
OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017
TRANSFER AND SHAREHOLDER SERVICING AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154
COUNSEL
Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176
AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY
A TAX-FREE
INCOME INVESTMENT
[LOGO]
STATEMENT OF
ADDITIONAL
INFORMATION
One Of The
Aquilasm Group Of Funds
<PAGE>
CHURCHILL TAX-FREE TRUST
PART C: OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements of the Churchill Tax-Free Fund of
Kentucky Portfolio:
Included in Part A:
Financial Highlights
Incorporated by reference into Part B:
Report of Independent Certified Public
Accountants
Statement of Investments as of December 31,
1997
Statement of Assets and Liabilities as of
December 31, 1997
Statement of Operations for the year ended
December 31, 1997
Statement of Changes in Net Assets for the
years ended December 31, 1997 and 1996
Notes to Financial Statements
Included in Part C:
Consent of Independent Certified Public
Accountants
(b) Exhibits of the Churchill Tax-Free Fund of Kentucky
Portfolio:
(1) Supplemental Declaration of Trust Amending and
Restating the Declaration of Trust (ii)
(2) By-laws (ii)
(3) Not applicable
(4) Specimen share certificate (iii)
(5) Investment Advisory and Administration
Agreement (iv)
(5) (a) Sub-Advisory Agreement (iv)
(6) (a) Distribution Agreement (iii)
(6) (b) Sales Agreement for brokerage firms (iii)
(6) (c) Sales Agreement for financial institutions (iii)
(6) (d) Services Agreement (ii)
(7) Not applicable
(8) Custody Agreement (ii)
(9) (a) Transfer Agency Agreement (iv)
(10) Opinion and consent of Trust counsel (iv)
(11) Not applicable
(12) Not applicable
(13) Not Applicable)
(14) Not applicable
(15) Distribution Plan (iv)
(15) (a) Shareholder Services Plan (iv)
(16) Schedule for computation
of performance quotations (iv)
(17) Financial Data Schedules (iv)
(18) Plan Pursuant to Rule 18f-3 (iv)
(i) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 13 dated January 29, 1996 and incorporated herein
by reference.
(ii) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 15 dated April 15, 1996, and incorporated herein by
reference.
(iii) Filed as an exhibit to Registrant's Post-Effective
Amendment No. 16 dated April 24, 1997, and incorporated herein by
reference.
(iv) Filed herewith.
ITEM 25. Persons Controlled By Or Under Common Control With
Registrant
None
ITEM 26. Number of Holders of Securities
As of March 31, 1998, Registrant had 4,079 holders of
record of its Class A Shares, 30 holders of its Class C Shares
and 85 holders of its Class Y Shares, all in the Churchill Tax-
Free Fund of Kentucky portfolio.
ITEM 27. Indemnification
ITEM 27. Indemnification
Subdivision (c) of Section 12 of Article SEVENTH of
Registrant's Supplemental Declaration of Trust Amending and
Restating the Declaration of Trust, filed as Exhibit 1 to
Registrant's Post-Effective Amendment No. 15 dated March 28,
1996, is incorporated herein by reference. Insofar as
indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers, and
controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that
in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed
in that Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities
(other than the payment by Registrant of expenses incurred
or paid by a Trustee, officer, or controlling person of
Registrant in the successful defense of any action,suit, or
proceeding) is asserted by such Trustee, officer, or
controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser
Banc One Investment Advisors Corporation, Registrant's
investment adviser, performs investment advisory services
for mutual fund and other clients. For information as to the
business, profession, vocation, or employment of a
substantial nature of its Directors and officers, reference
is made to the Form ADV filed by it under the Investment
Advisers Act of 1940.
ITEM 29. Principal Underwriters
(a) Aquila Distributors, Inc. serves as principal underwriter to
Capital Cash Management Trust, Churchill Cash Reserves
Trust, Hawaiian Tax-Free Trust, Narragansett Insured Tax-
Free Income Fund, Pacific Capital Cash Assets Trust, Pacific
Capital Tax-Free Cash Assets Trust, Pacific Capital U.S.
Government Securities Cash Assets Trust, Prime Cash Fund,
Tax-Free Fund For Utah, Tax-Free Fund of Colorado, Tax-
Free Trust of Arizona, Aquila Rocky Mountain Equity Fund and
Tax-Free Trust of Oregon,in addition to serving as the
Registrant's principal underwriter.
(b) For information about the Directors and officers of Aquila
Distributors, Inc., reference is made to the Form BD filed
by it under the Securities Exchange Act of 1934.
(c) Not applicable.
ITEM 30. Location of Accounts and Records
All such accounts, books, and other documents are maintained
by the adviser, the administrator, the transfer agent, and
the custodian, whose addresses appear on the back cover
pages of the Prospectus and the Statement of Additional
Information.
ITEM 31. Management Services
Not applicable.
ITEM 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) If the information called for by Item 5A is contained
in the Registrant's latest annual report to
shareholders, the Registrant undertakes to furnish each
person to whom a prospectus is delivered with a copy of
the Registrant's latest Annual Report to Shareholders,
upon request and without charge.
<PAGE>
Consent of Independent Auditors
To the Shareholders and Board of Trustees
Churchill Tax-Free Fund of Kentucky:
We consent to the use of our report dated February 6, 1998,
incorporated herein by reference, and to the reference to our
firm under the headings "Financial Highlights" in the Prospectus
and "Custodian and Auditors" and "Financial Statements" in the
Statement of Additional Information.
New York, New York KPMG Peat Marwick LLP
April 24, 1998 /s/KPMG Peat Marwick LLP
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant
certifies that it meets all the requirements for effectiveness of
this Amendment to its Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933, and has caused this
Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of New York and State of New York, on the 28th day of April,
1998.
CHURCHILL TAX-FREE TRUST
(Registrant)
By /s/ Lacy B. Herrmann
_____________________________
Lacy B. Herrmann, President
and Chairman of the Board
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement or Amendment has been signed
below by the following persons in the capacities and on the date
indicated.
SIGNATURE TITLE DATE
/s/Lacy B. Herrmann 4/28/98
______________________ President, Chairman of ___________
Lacy B. Herrmann the Board and Trustee
(Principal Executive
Officer)
/s/Thomas A. Christopher 4/28/98
______________________ Trustee ___________
Thomas A. Christopher
/s/Douglas Dean 4/28/98
______________________ Trustee ___________
Douglas Dean
/s/Diana P. Herrmann 4/28/98
______________________ Trustee ___________
Diana P. Herrmann
/s/Ann R. Leven 4/28/98
______________________ Trustee ___________
Ann R. Leven
/s/Theodore T. Mason 4/28/98
______________________ Trustee ___________
Theodore T. Mason
/s/Anne J. Mills 4/28/98
______________________ Trustee ___________
Anne J. Mills
/s/William J. Nightingale 4/28/98
______________________ Trustee ___________
William J. Nightingale
/s/James R. Ramsey 4/28/98
______________________ Trustee ___________
James R. Ramsey
/s/Rose F. Marotta 4/28/98
________________________ Chief Financial Officer ___________
Rose F. Marotta (Principal Financial and
Accounting Officer)
<PAGE>
CHURCHILL TAX-FREE TRUST
EXHIBIT INDEX
Number Name
(5) Investment Advisory and Administration
Agreement (iv)
(5) (a) Sub-Advisory Agreement
(9) (a) Transfer Agency Agreement (iv)
(10) Opinion and consent of Trust counsel (iv)
(15) Distribution Plan (iv)
(15) (a) Shareholder Services Plan (iv)
(16) Schedule for computation
of performance quotations (iv)
(17) Financial Data Schedules (iv)
(18) Plan Pursuant to Rule 18f-3 (iv)
Correspondence
CHURCHILL TAX-FREE FUND OF KENTUCKY
ADVISORY AND ADMINISTRATION AGREEMENT
THIS AGREEMENT, made as of [ ], 1998 by and
between CHURCHILL TAX-FREE TRUST (the "Business Trust"),
380 Madison Avenue, Suite 2300, New York, New York 10017
and AQUILA MANAGEMENT CORPORATION (the "Manager"), a New
York corporation, 380 Madison Avenue, Suite 2300, New York,
New York 10017
W I T N E S S E T H:
WHEREAS, the Business Trust is a Massachusetts
business trust which is registered under the Investment
Company Act of 1940 (the "Act") as an open-end, non-
diversified management investment company, the sole series
and portfolio of which is Churchill Tax-Free Fund of
Kentucky (the "Fund");
WHEREAS, the Business Trust and the Manager wish to
enter into an Advisory and Administration Agreement
referred to hereafter as "this Agreement," with respect to
the Fund;
NOW THEREFORE, in consideration of the mutual promises
and agreements herein contained and other good and valuable
consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1. In General
The Manager shall perform (at its own expense) the
functions set forth more fully herein for the Fund.
2. Duties and Obligations of the Manager
(a) Investment Advisory Services Subject to the
succeeding provisions of this section and subject to the
direction and control of the Board of Trustees of the
Business Trust, the Manager shall:
(i) supervise continuously the investment program of
the Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or
sold by the Fund;
(iii) arrange for the purchase and the sale of
securities held in the portfolio of the Fund;
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other
source of pricing information satisfactory to the Fund
and, unless otherwise directed by the Board of
Trustees, provide for pricing of the Fund's portfolio
at least quarterly using another such source
satisfactory to the Fund; and
Subject to the provisions of Section 5 hereof, the Manager
may at its own expense delegate to a qualified organization
("Sub-Adviser"), affiliated or not affiliated with the
Manager, any or all of the above duties. Any such
delegation of the duties set forth in (i), (ii) or (iii)
above shall be by a written agreement (the "Sub-Advisory
Agreement") approved as provided in Section 15 of the
Investment Company Act of 1940.
(b) Administration. Subject to the succeeding
provisions of this section and subject to the direction and
control of the Board of Trustees of the Business Trust, the
Manager shall provide all administrative services to the
Fund other than those relating to its investment portfolio
delegated to a Sub-Adviser of the Fund under a Sub-Advisory
Agreement; as part of such administrative duties, the
Manager shall:
(i) provide office space, personnel, facilities and
equipment for the performance of the following
functions and for the maintenance of the headquarters
of the Fund;
(ii) oversee all relationships between the Fund and
any sub-adviser, transfer agent, custodian, legal
counsel, auditors and principal underwriter, including
the negotiation of agreements in relation thereto, the
supervision and coordination of the performance of
such agreements, and the overseeing of all
administrative matters which are necessary or
desirable for the effective operation of the Fund and
for the sale, servicing or redemption of the Fund's
shares;
(iii) either keep the accounting records of the Fund,
including the computation of net asset value per share
and the dividends (provided that if there is a Sub-
Adviser, daily pricing of the Fund's portfolio shall
be the responsibility of the Sub-Adviser under the
Sub-Advisory Agreement) or, at its expense and
responsibility, delegate such duties in whole or in
part to a company satisfactory to the Fund;
(iv) maintain the Fund's books and records, and
prepare (or assist counsel and auditors in the
preparation of) all required proxy statements, reports
to the Fund's shareholders and Trustees, reports to
and other filings with the Securities and Exchange
Commission and any other governmental agencies, and
tax returns, and oversee the insurance relationships
of the Fund;
(v) prepare, on behalf of the Fund and at the Fund's
expense, such applications and reports as may be
necessary to register or maintain the registration of
the Fund and/or its shares under the securities or
"Blue-Sky" laws of all such jurisdictions as may be
required from time to time;
(vi) respond to any inquiries or other communications
of shareholders of the Fund and broker-dealers, or
if any such inquiry or communication is more properly
to be responded to by the Fund's shareholder servicing
and transfer agent or distributor, oversee such
shareholder servicing and transfer agent's or
distributor's response thereto.
(c) Compliance with Requirements. Any investment
program furnished, and any activities performed, by the
Manager or by a Sub-Adviser under this section shall at all
times conform to, and be in accordance with, any
requirements imposed by: (1) the Investment Company Act of
1940 (the "Act") and any rules or regulations in force
thereunder; (2) any other applicable laws, rules and
regulations; (3) the Declaration of Trust and By-Laws of
the Business Trust as amended from time to time; (4) any
policies and determinations of the Board of Trustees of the
Business Trust; and (5) the fundamental policies of the
Fund, as reflected in its registration statement under the
Act or as amended by the shareholders of the Fund.
(d) Best Efforts; Responsibility. The Manager shall
give the Fund the benefit of its best judgment and effort
in rendering services hereunder, but the Manager shall not
be liable for any loss sustained by reason of the adoption
of any investment policy or the purchase, sale or retention
of any security, whether or not such purchase, sale or
retention shall have been based upon (i) its own
investigation and research or (ii) investigation and
research made by any other individual, firm or corporation,
if such purchase, sale or retention shall have been made
and such other individual, firm or corporation shall have
been selected in good faith by the Manager or a Sub-
Adviser.
(e) Other Customers. Nothing in this Agreement shall
prevent the Manager or any officer thereof from acting as
investment adviser, sub-adviser, administrator or manager
for any other person, firm, or corporation, and shall not
in any way limit or restrict the Manager or any of its
officers, stockholders or employees from buying, selling or
trading any securities for its own or their own accounts or
for the accounts of others for whom it or they may be
acting, provided, however, that the Manager expressly
represents that it will undertake no activities which, in
its judgment, will adversely affect the performance of its
obligations under this Agreement.
(f) Order Allocation. In connection with any duties
for which it may become responsible to arrange for the
purchase and sale of the Fund's portfolio securities, the
Manager shall select, and shall cause any Sub-Adviser to
select, such broker-dealers ("dealers") as shall, in the
Manager's judgment, implement the policy of the Fund to
achieve "best execution," i.e., prompt, efficient, and
reliable execution of orders at the most favorable net
price. The Manager shall cause the Fund to deal directly
with the selling or purchasing principal or market maker
without incurring brokerage commissions unless the Manager
determines that better price or execution may be obtained
by paying such commissions; the Fund expects that most
transactions will be principal transactions at net prices
and that the Fund will incur little or no brokerage costs.
The Business Trust understands that purchases from
underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions
placed through dealers include a spread between the bid and
asked prices. In allocating transactions to dealers, the
Manager is authorized and shall authorize any Sub-Adviser,
to consider, in determining whether a particular dealer
will provide best execution, the dealer's reliability,
integrity, financial condition and risk in positioning the
securities involved, as well as the difficulty of the
transaction in question, and thus need not pay the lowest
spread or commission available if the Manager determines in
good faith that the amount of commission is reasonable in
relation to the value of the brokerage and research
services provided by the dealer, viewed either in terms of
the particular transaction or the Manager's overall
responsibilities. If, on the foregoing basis, the
transaction in question could be allocated to two or more
dealers, the Manager is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii)
whether a dealer has sold shares of the Fund. Such
research may be in written form or through direct contact
with individuals and may include quotations on portfolio
securities and information on particular issuers and
industries, as well as on market, economic, or
institutional activities. The Business Trust recognizes
that no dollar value can be placed on such research
services or on execution services and that such research
services may or may not be useful to the Fund and may be
used for the benefit of the Manager or its other clients.
The Manager shall cause the foregoing provisions, in
substantially the same form, to be included in any Sub-
Advisory Agreement.
(g) Registration Statement; Information. It is agreed
that the Manager shall have no responsibility or liability
for the accuracy or completeness of the Business Trust's
Registration Statement under the Act and the Securities Act
of 1933, except for information supplied by the Manager for
inclusion therein. The Manager shall promptly inform the
Business Trust as to any information concerning the Manager
appropriate for inclusion in such Registration Statement,
or as to any transaction or proposed transaction which
might result in an assignment of the Agreement.
(h) Liability for Error. The Manager shall not be
liable for any error in judgment or for any loss suffered
by the Fund or its security holders in connection with the
matters to which this Agreement relates, except a loss
resulting from wilful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties
under this Agreement. Nothing in this Agreement shall, or
shall be construed to, waive or limit any rights which the
Fund may have under federal and state securities laws which
may impose liability under certain circumstances on persons
who act in good faith.
(j) Indemnification. The Business Trust shall
indemnify the Manager to the full extent permitted by the
Business Trust's Declaration of Trust.
3. Allocation of Expenses
The Manager shall, at its own expense, provide office
space, facilities, equipment, and personnel for the
performance of its functions hereunder and shall pay all
compensation of Trustees, officers, and employees of the
Fund who are affiliated persons of the Manager.
The Fund agrees to bear the costs of preparing and
setting in type its prospectuses, statements of additional
information and reports to its shareholders, and the costs
of printing or otherwise producing and distributing those
copies of such prospectuses, statements of additional
information and reports as are sent to its shareholders.
All costs and expenses not expressly assumed by the Manager
under this sub-section or otherwise by the Manager,
administrator or principal underwriter or by any Sub-
Adviser shall be paid by the Fund, including, but not
limited to (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation
and expenses of its Trustees other than those affiliated
with the Manager or such adviser, administrator or
principal underwriter; (v) legal and audit expenses; (vi)
custodian and transfer agent, or shareholder servicing
agent, fees and expenses; (vii) expenses incident to the
issuance of its shares (including issuance on the payment
of, or reinvestment of, dividends); (viii) fees and
expenses incident to the registration under Federal or
State securities laws of the Fund or its shares; (ix)
expenses of preparing, printing and mailing reports and
notices and proxy material to shareholders of the Fund; (x)
all other expenses incidental to holding meetings of the
Fund's shareholders; and (xi) such non-recurring expenses
as may arise, including litigation affecting the Fund and
the legal obligations for which the Business Trust may have
to indemnify its officers and Trustees.
4. Compensation of the Manager The Business Trust agrees
to pay the Manager, and the Manager agrees to accept as
full compensation for all services rendered by the Manager
as such, an annual fee payable monthly and computed on the
net asset value of the Fund as of the close of business
each business day at the annual rate of 0.50 of 1% of such
net asset value; provided, however, that for any day that
the Business Trust pays or accrues a fee under the
Distribution Plan of the Fund based upon the assets of the
Fund, the annual management fee shall be payable at the
annual rate of 0.40 of 1% of such net asset value.
5. Termination of Sub-Advisory Agreement
The Sub-Advisory Agreement may provide for its
termination by the Manager upon reasonable notice,
provided, however, that the Manager agrees not to terminate
the Sub-Advisory Agreement except in accordance with such
authorization and direction of the Board of Trustees, if
any, as may be in effect from time to time.
6. Duration and Termination of this Agreement
(a) Duration. This Agreement shall become as of the
date first written above following approval by the
shareholders of the Fund and shall, unless terminated as
hereinafter provided, continue in effect until the June 30
next preceding the first anniversary of the effective date
of this Agreement, and from year to year thereafter, but
only so long as such continuance is specifically approved
at least annually (1) by a vote of the Business Trust's
Board of Trustees, including a vote of a majority of the
Trustees who are not parties to this Agreement or
"interested persons" (as defined in the Act) of any such
party, with votes cast in person at a meeting called for
the purpose of voting on such approval, or (2) by a vote of
the holders of a "majority" (as so defined) of the
outstanding voting securities of the Fund and by such a
vote of the Trustees.
(b) Termination. This Agreement may be terminated by
the Manager at any time without penalty upon giving the
Business Trust sixty days' written notice (which notice may
be waived by the Business Trust) and may be terminated by
the Business Trust at any time without penalty upon giving
the Manager sixty days' written notice (which notice may be
waived by the Manager), provided that such termination by
the Business Trust shall be directed or approved by a vote
of a majority of its Trustees in office at the time or by a
vote of the holders of a majority (as defined in the Act)
of the voting securities of the Fund outstanding and
entitled to vote. The portions of this Agreement which
relate to providing investment advisory services (Sections
2(a), (c), (d) and (e)) shall automatically terminate in
the event of the assignment (as defined in the Act) of this
Agreement, but all other provisions relating to providing
services other than investment advisory services shall not
terminate, provided however, that upon such an assignment
the annual fee payable monthly and computed on the net
asset value of the Fund as of the close of business each
business day shall be reduced to the annual rate of 0.33 of
1% of such net asset value and provided further that for
any day that the Business Trust pays or accrues a fee under
the Distribution Plan of the Fund based upon the assets of
the Fund, the annual management fee shall be payable at the
annual rate of 0.26 of 1% of such net asset value.
7. Disclaimer of Shareholder Liability
The Manager understands that the obligations of this
Agreement are not binding upon any shareholder of the Fund
personally, but bind only the Business Trust's property;
the Manager represents that it has notice of the provisions
of the Business Trust's Declaration of Trust disclaiming
shareholder liability for acts or obligations of the Fund.
8. Notices of Meetings
The Business Trust agrees that notice of each
meeting of the Board of Trustees of the Business Trust will
be sent to the Manager and that the Business Trust will
make appropriate arrangements for the attendance (as
persons present by invitation) of such person or persons as
the Manager may designate.
IN WITNESS WHEREOF, the parties hereto have caused
this instrument to be executed by their duly authorized
officers and
their seals to be hereunto affixed, all as of the day and
year first above written.
ATTEST: CHURCHILL TAX-FREE TRUST
______________________ By:____________________________
ATTEST: AQUILA MANAGEMENT CORPORATION
_______________________ By:___________________________
CHURCHILL TAX-FREE FUND OF KENTUCKY
SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made as of [ ], 1998 by and between
AQUILA MANAGEMENT CORPORATION (the "Manager"), 380 Madison
Avenue, Suite 2300, New York, New York 10017, and BANC ONE
INVESTMENT ADVISORS CORPORATION (the "Sub- Adviser"), 416 West
Jefferson Street, Louisville, KY 40202.
W I T N E S S E T H :
WHEREAS, CHURCHILL TAX-FREE TRUST (the "Business Trust") is
a Massachusetts business trust which is registered under the
Investment Company Act of 1940 (the "Act") as an open-end, non-
diversified management investment company, the sole series and
portfolio of which is Churchill Tax-Free Fund of Kentucky (the
"Fund");
WHEREAS, the Manager has entered into an Advisory and
Administration Agreement as of the date hereof with the Business
Trust (the "Advisory and Administration Agreement") pursuant to
which the Manager shall act as investment adviser with respect to
the Fund; and
WHEREAS, pursuant to paragraph 2 of the Advisory and
Administration Agreement, the Manager wishes to retain the Sub-
Adviser for purposes of rendering investment advisory services to
the Manager in connection with the Fund upon the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable
consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. In General
The Manager hereby appoints the Sub-Adviser to render, to
the Manager and to the Fund, investment research and advisory
services as set forth below under the supervision of the Manager
and subject to the approval and direction of the Board of
Trustees of the Business Trust. The Sub-Adviser shall, all as
more fully set forth herein, act as managerial investment adviser
to the Fund with respect to the investment of the Fund's assets,
and supervise and arrange the purchase of securities for and the
sale of securities held in the portfolio of the Fund.
2. Duties and Obligations of the Sub-Adviser With Respect To
Investment of the Assets of the Fund
(a) Subject to the succeeding provisions of this section and
subject to the direction and control of the Manager and the Board
of Trustees of the Business Trust, the Sub-Adviser shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund;
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund; and
(v) consult with the Manager in connection with its duties
hereunder.
(b) Any investment program furnished by the Sub-Adviser
under this section shall at all times conform to, and be in
accordance with, any requirements imposed by: (1) the Investment
Company Act of 1940 (the "Act") and any rules or regulations in
force thereunder; (2) any other applicable laws, rules and
regulations; (3) the Declaration of Trust and By-Laws of the
Business Trust as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Business Trust;
and (5) the fundamental policies of the Fund, as reflected in its
registration statement under the Act or as amended by the
shareholders of the Fund.
(c) The Sub-Adviser shall give to the Manager and to the
Fund the benefit of its best judgment and effort in rendering
services hereunder, but the Sub-Adviser shall not be liable for
any loss sustained by reason of the adoption of any investment
policy or the purchase, sale or retention of any security,
whether or not such purchase, sale or retention shall have been
based upon (i) its own investigation and research or (ii)
investigation and research made by any other individual, firm or
corporation, if such purchase, sale or retention shall have been
made and such other individual, firm or corporation shall have
been selected in good faith by the Sub-Adviser.
(d) Nothing in this Agreement shall prevent the Sub-Adviser
or any affiliated person (as defined in the Act) of the Sub-
Adviser from acting as investment adviser or manager for any
other person, firm or corporation and shall not in any way limit
or restrict the Sub-Adviser or any such affiliated person from
buying, selling or trading any securities for its own or their
own accounts or for the accounts of others for whom it or they
may be acting, provided, however, that the Sub-Adviser expressly
represents that, while acting as Sub-Adviser, it will undertake
no activities which, in its judgment, will adversely affect the
performance of its obligations to the Fund under this Agreement.
(e) In connection with its duties to arrange for the
purchase and sale of the Fund's portfolio securities, the Sub-
Adviser shall select such broker-dealers ("dealers") as shall, in
the Sub-Adviser's judgment, implement the policy of the Fund to
achieve "best execution," i.e., prompt, efficient, and reliable
execution of orders at the most favorable net price. The Sub-
Adviser shall cause the Fund to deal directly with the selling or
purchasing principal or market maker without incurring brokerage
commissions unless the Sub-Adviser determines that better price
or execution may be obtained by paying such commissions; the Fund
expects that most transactions will be principal transactions at
net prices and that the Fund will incur little or no brokerage
costs. The Business Trust understands that purchases from
underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked
prices. In allocating transactions to dealers, the Sub-Adviser
is authorized to consider, in determining whether a particular
dealer will provide best execution, the dealer's reliability,
integrity, financial condition and risk in positioning the
securities involved, as well as the difficulty of the transaction
in question, and thus need not pay the lowest spread or
commission available if the Sub-Adviser determines in good faith
that the amount of commission is reasonable in relation to the
value of the brokerage and research services provided by the
dealer, viewed either in terms of the particular transaction or
the Sub-Adviser's overall responsibilities. If, on the foregoing
basis, the transaction in question could be allocated to two or
more dealers, the Sub-Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the Fund. Such research may be in
written form or through direct contact with individuals and may
include quotations on portfolio securities and information on
particular issuers and industries, as well as on market,
economic, or institutional activities. The Business Trust
recognizes that no dollar value can be placed on such research
services or on execution services and that such research services
may or may not be useful to the Fund and may be used for the
benefit of the Sub-Adviser or its other clients.
(f) The Sub-Adviser agrees to maintain, and to preserve for
the periods prescribed, such books and records with respect to
the portfolio transactions of the Fund as are required by
applicable law and regulation, and agrees that all records which
it maintains for the Fund on behalf of the Manager shall be the
property of the Fund and shall be surrendered promptly to the
Fund or the Manager upon request.
(g) The Sub-Adviser agrees to furnish to the Manager and to
the Board of Trustees of the Business Trust such periodic and
special reports as each may reasonably request.
(h) It is agreed that the Sub-Adviser shall have no
responsibility or liability for the accuracy or completeness of
the Business Trust's Registration Statement under the Act and the
Securities Act of 1933, except for information supplied by the
Sub-Adviser for inclusion therein. The Sub-Adviser shall
promptly inform the Business Trust as to any information
concerning the Sub-Adviser appropriate for inclusion in such
Registration Statement, or as to any transaction or proposed
transaction which might result in an assignment (as defined in
the Act) of this Agreement.
(i) The Sub-Adviser shall not be liable for any error in
judgment or for any loss suffered by the Fund or its security
holders in connection with the matters to which this Agreement
relates, except a loss resulting from wilful misfeasance, bad
faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and
duties under this Agreement. Nothing in this Agreement shall, or
shall be construed to, waive or limit any rights which the Fund
may have under federal and state securities laws which may impose
liability under certain circumstances on persons who act in good
faith.
(j) To the extent that the Manager is indemnified under the
Business Trust's Declaration of Trust with respect to the
services provided hereunder by the Sub-Adviser, the Manager
agrees to provide the Sub-Adviser the benefits of such
indemnification.
3. Allocation of Expenses
The Sub-Adviser shall bear all of the expenses it incurs in
fulfilling its obligations under this Agreement. In particular,
but without limiting the generality of the foregoing: the Sub-
Adviser shall furnish, at the Sub-Adviser's expense, all office
space, facilities, equipment and clerical personnel necessary for
carrying out its duties under this Agreement. The Sub-Adviser
shall supply, or cause to be supplied, to any investment adviser,
administrator or principal underwriter of the Fund all necessary
financial information in connection with such adviser's,
administrator's or principal underwriter's duties under any
agreement between such adviser, administrator or principal
underwriter and the Fund. The Sub-Adviser will also pay all
compensation of the Fund's officers, employees, and Trustees, if
any, who are affiliated persons of the Sub-Adviser.
4. Compensation of the Sub-Adviser
The Manager agrees to pay the Sub-Adviser, and the Sub-
Adviser agrees to accept as full compensation for all services
rendered by the Sub-Adviser as such, a management fee payable
monthly and computed on the net asset value of the Fund as of the
close of business each business day at the annual rate of 0.17 of
1% of such net asset value; provided, however, that for any day
that the Fund pays or accrues a fee under the Distribution Plan
of the Fund based upon the assets of the Fund, the annual
management fee shall be payable at the annual rate of 0.14 of 1%
of such net asset value.
5. Duration and Termination
(a) This Agreement shall become effective as of the date
first written above following approval by the shareholders of the
Fund and shall, unless terminated as hereinafter provided,
continue in effect until the June 30 next preceding the first
anniversary of the effective date of this Agreement, and from
year to year thereafter, but only so long as such continuance is
specifically approved at least annually (1) by a vote of the
Business Trust's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to this Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities
of the Fund and by such a vote of the Trustees.
(b) This Agreement may be terminated by the Sub-Adviser at
any time without penalty upon giving the Manager and the Business
Trust sixty days' written notice (which notice may be waived).
This Agreement may be terminated by the Manager or the Business
Trust at any time without penalty upon giving the Sub-Adviser
sixty days' written notice (which notice may be waived by the
Sub-Adviser), provided that such termination by the Business
Trust shall be directed or approved by a vote of a majority of
its Trustees in office at the time or by a vote of the holders of
a majority (as defined in the Act) of the voting securities of
the Fund outstanding and entitled to vote. This Agreement shall
automatically terminate in the event of its assignment (as
defined in the Act) or the termination of the Advisory and
Administration Agreement.
6. Notices of Meetings
The Manager agrees that notice of each meeting of the Board
of Trustees of the Business Trust will be sent to the Sub-Adviser
and that Sub-Adviser will make appropriate arrangements for the
attendance (as persons present by invitation) of such person or
persons as the Sub-Adviser may designate.
IN WITNESS WHEREOF, the parties hereto have caused the
foregoing instrument to be executed by their duly authorized
officers and their seals to be hereunto affixed, all as of the
day and year first above written.
ATTEST: AQUILA MANAGEMENT CORPORATION
_______________________ By:__________________________
ATTEST: BANC ONE INVESTMENT ADVISORS CORPORATION
_______________________ By:___________________________
TRANSFER AGENCY SERVICES AGREEMENT
THIS AGREEMENT is made as of November 7, 1997 by and between
PFPC INC., a Delaware corporation ("PFPC"), and CHURCHILL TAX-
FREE TRUST, a Massachusetts business trust (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Fund wishes to retain PFPC to serve as transfer
agent, registrar, dividend disbursing agent and shareholder
servicing agent to its investment portfolios listed on Exhibit A
attached hereto and made a part hereof, as such Exhibit A may be
amended from time to time (each a "Portfolio"), and PFPC wishes
to furnish such services, on the terms and for the considerations
set forth in this agreement (the "Agreement").
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Definitions. As used in this Agreement:
(a) "1933 Act" means the Securities Act of 1933, as
amended.
(b) "1934 Act" means the Securities Exchange Act of
1934, as amended.
(c) "Authorized Person" means any officer of the Fund
and any other person duly authorized by the Fund's Board of
Trustees to give Oral Instructions and Written Instructions on
behalf of the Fund and listed on the Authorized Persons Appendix
attached hereto and made a part hereof or any amendment thereto
as may be received by PFPC. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such
limitation in the Authorized Persons Appendix.
(d) "CEA" means the Commodities Exchange Act, as
amended.
(e) "Oral Instructions" mean oral instructions
received by PFPC from an Authorized Person or from a person
reasonably believed by PFPC to be an Authorized Person.
(f) "SEC" means the Securities and Exchange
Commission.
(g) "Securities Laws" mean the 1933 Act, the 1934 Act,
the 1940 Act and the CEA.
(h) "Shares" mean the shares of beneficial interest
of any series or class of the Fund.
(i) "Written Instructions" mean written instructions
signed by an Authorized Person and received by PFPC. The
instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PFPC to serve as
transfer agent, registrar, dividend disbursing agent and
shareholder servicing agent to the Fund in accordance with the
terms set forth in this Agreement. PFPC accepts such appointment
and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where
applicable, will provide PFPC with the following:
(a) Certified or authenticated copies of the
resolutions of the Fund's Board of Trustees,
approving the appointment of PFPC or its
affiliates to provide services to the Fund and
approving this Agreement;
(b) A copy, and all amendments thereto, of the Fund's
most recent effective registration statement;
(c) A copy of the applicable administration, advisory
and/or sub-advisory agreements, and all amendments
thereto, with respect to each Portfolio;
(d) A copy of the distribution agreement, and all
amendments thereto, with respect to each class of
Shares;
(e) Copies of any shareholder servicing agreements,
and all amendments thereto, made in respect of the
Fund or a Portfolio;
(f) The Fund's Declaration of Trust filed with the
Secretary of State of the Commonwealth of
Massachusetts and all amendments thereto (such
Declaration of Trust, as presently in effect and
as it shall from time to time be amended, is
herein called the "Declaration of Trust"); and
(g) The Fund's By-Laws and all amendments thereto
(such By-Laws, as presently in effect and as they
shall from time to time be amended, are
hereinafter called the "By-Laws").
PFPC has furnished the Fund with copies properly
certified or authenticated of its Registration Statement on Form
TA-1 under the Securities and Exchange Act of 1934, as amended
and all other public reports filed with the SEC related to the
services provided to the Fund as may be requested from time to
time by the Fund.
4. Compliance with Rules and Regulations. PFPC undertakes
to comply with all applicable requirements of the Securities Laws
and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed by
PFPC hereunder. Except as specifically set forth herein, PFPC
assumes no responsibility for such compliance by the Fund or any
of its investment portfolios.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PFPC
shall act only upon Oral Instructions and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral
Instructions and Written Instructions it receives from an
Authorized Person (or from a person reasonably believed by PFPC
to be an Authorized Person) pursuant to this Agreement. PFPC may
assume that any Oral Instruction or Written Instruction received
hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Board of Trustees or of
the Fund's shareholders, unless and until PFPC receives Written
Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written
Instructions confirming Oral Instructions so that PFPC receives
the Written Instructions by the close of business on the same day
that such Oral Instructions are received. The fact that such
confirming Written Instructions are not received by PFPC shall in
no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral
Instructions or Written Instructions reasonably appear to have
been received from an Authorized Person, PFPC shall incur no
liability to the Fund in acting upon such Oral Instructions or
Written Instructions provided that PFPC's actions comply with the
other provisions of this Agreement.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any
action it should or should not take, PFPC may request directions
or advice, including Oral Instructions or Written Instructions,
from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as
to any question of law pertaining to any action it should or
should not take, PFPC may request advice at its own cost from
such counsel of its own choosing (who may be counsel for the
Fund, the Fund's investment adviser or PFPC, at the option of
PFPC).
(c) Conflicting Advice. In the event of a conflict
between directions, advice or Oral Instructions or Written
Instructions PFPC receives from the Fund, and the advice it
receives from counsel, PFPC may rely upon and follow the advice
of counsel. In the event PFPC so relies on the advice of
counsel, PFPC remains liable for any action or omission on the
part of PFPC which constitutes willful misfeasance, bad faith,
negligence or reckless disregard by PFPC of any duties,
obligations or responsibilities set forth in this Agreement.
(d) Protection of PFPC. PFPC shall be protected in
any action it takes or does not take in reliance upon directions,
advice or Oral Instructions or Written Instructions it receives
from the Fund or from counsel and which PFPC believes, in good
faith, to be consistent with those directions, advice or Oral
Instructions or Written Instructions. Nothing in this section
shall be construed so as to impose an obligation upon PFPC (i) to
seek such directions, advice or Oral Instructions or Written
Instructions, or (ii) to act in accordance with such directions,
advice or Oral Instructions or Written Instructions unless, under
the terms of other provisions of this Agreement, the same is a
condition of PFPC's properly taking or not taking such action.
Nothing in this subsection shall excuse PFPC when an action or
omission on the part of PFPC constitutes willful misfeasance, bad
faith, negligence or reckless disregard by PFPC of any duties,
obligations or responsibilities set forth in this Agreement.
7. Records; Visits. The books and records pertaining to
the Fund which are in the possession or under the control of PFPC
shall be the property of the Fund. Such books and records shall
be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. PFPC will,
if so requested by counsel to the Fund, work with such counsel to
develop an acceptable modification to the manner in which such
books and records are prepared and maintained so as to comply
with the reasonable opinion of such counsel as to such laws and
rules. Such modification will be subject to additional mutually-
agreed upon pricing, if any. The Fund and Authorized Persons
shall have access to such books and records at all times during
PFPC's normal business hours. Copies of any such books and
records shall be provided by PFPC to the Fund or to an Authorized
Person at the Fund's expense. Prior to any destruction of any
books or records, PFPC will advise the Fund of the proposed
destruction and in accordance with instructions of the Fund, the
records will be destroyed or, at the expense of the Fund,
delivered to the Fund or as it may otherwise direct.
8. Confidentiality. PFPC agrees to keep confidential all
records of the Fund and information relating to the Fund and its
shareholders, unless the release of such records or information
is otherwise consented to, in writing, by the Fund, and shall
maintain procedures reasonably designed to protect such
confidentiality. The Fund agrees that its consent shall not be
unreasonably withheld and may not be withheld where PFPC may be
exposed to civil or criminal contempt proceedings or when
required to divulge such information or records to duly
constituted authorities, and that such consent shall not be
required where consent or notice to the Fund is not permitted by
law or regulation.
9. Cooperation with Accountants. PFPC shall cooperate
with the Fund's independent public accountants and shall take all
reasonable actions in the performance of its obligations under
this Agreement to ensure that the necessary information is made
available on a timely basis to such accountants for the
expression of their opinion, as required by the Fund.
10. Adequate Facilities; Disaster Recovery. PFPC shall
maintain adequate personnel and facilities, as well as adequate
and reliable computer and other equipment, necessary and
appropriate to carry out its obligations under this Agreement,
including appropriate duplicate files (which shall be readable
by computer or otherwise or maintained in hard copy form, and
shall be maintained at a frequency and in a detail reasonably
designed pursuant to industry standards to provide for protection
of such files in the event of a disaster to PFPC's facilities).
PFPC shall enter into and shall maintain in effect with
appropriate parties one or more agreements making adequate and
reliable provisions for emergency use of electronic data
processing equipment to the extent appropriate equipment is
available. In the event of equipment failures, PFPC shall, at no
additional expense to the Fund, take reasonable steps to minimize
service interruptions. PFPC shall periodically back up data
(including all predecessor transfer agent data delivered to PFPC
by the Fund's prior transfer agent in a machine readable format
and converted by PFPC) on appropriate media to be stored at an
offsite facility of PFPC's choosing. PFPC shall have no
liability with respect to the loss of data or service
interruptions caused by equipment failure or otherwise, provided
such loss or interruption is not caused by PFPC's own willful
misfeasance, bad faith, negligence or reckless disregard of its
duties or obligations under this Agreement.
11. Insurance. PFPC shall maintain adequate fidelity,
error and omissions and other insurance coverage in connection
with its transfer agent services throughout the duration of this
Agreement.
12. Compensation. As compensation for services rendered by
PFPC during the term of this Agreement, for the period commencing
on the date upon which PFPC becomes transfer agent for the Fund,
the Fund will pay to PFPC a fee or fees as agreed to from time to
time in writing by the Fund and PFPC. All services detailed in
this Agreement and expenses incurred in the performance of these
services will be provided by PFPC without cost to the Fund except
as otherwise stated in this Agreement or otherwise agreed to in
writing.
13. Indemnification. The Fund agrees to indemnify and hold
harmless PFPC and its affiliates from all taxes, charges,
expenses, assessments, claims and liabilities (including, without
limitation, liabilities arising under the Securities Laws and any
state and foreign securities and blue sky laws, and amendments
thereto), and expenses, including (without limitation) attorneys'
fees and disbursements, arising directly or indirectly from (i)
any action or omission to act which PFPC takes (a) at the request
or on the direction of or in reliance on the advice of the Fund
or (b) upon Oral Instructions or Written Instructions or (ii) the
acceptance, processing and/or negotiation of checks or other
methods utilized for the purchase of Shares. Neither PFPC nor
any of its affiliates shall be indemnified against any liability
(or any expenses incident to such liability) arising out of
PFPC's or its affiliates' own willful misfeasance, bad faith,
negligence or reckless disregard of its duties and obligations
under this Agreement.
14. Release. PFPC understands that the obligations of this
Agreement are not binding upon any shareholder of the Fund
personally, but bind only the Fund's property; PFPC represents
that it has notice of the provision in the Fund's Declaration of
Trust disclaiming shareholder liability for acts or obligations
of the Fund.
15. Responsibility of PFPC.
(a) PFPC shall be under no duty to take any action on
behalf of the Fund except as specifically set forth herein or as
may be specifically agreed to by PFPC in writing. PFPC shall be
obligated to exercise care and diligence in the performance of
its duties hereunder, to act in good faith and to use its best
efforts, within reasonable limits, to ensure the accuracy and
completeness of all services performed under this Agreement.
PFPC shall be liable for any damages arising out of PFPC's
failure to perform its duties under this Agreement to the extent
such damages arise out of PFPC's willful misfeasance, bad faith,
negligence or reckless disregard of such duties.
(b) Without limiting the generality of the foregoing
or of any other provision of this Agreement, (i) PFPC shall not
be liable for losses beyond its control, provided that PFPC has
acted in accordance with the standard of care set forth above;
and (ii) PFPC shall not be under any duty or obligation to
inquire into and shall not be liable for (A) the validity or
invalidity or authority or lack thereof of any Oral Instruction
or Written Instruction, notice or other instrument which conforms
to the applicable requirements of this Agreement, and which PFPC
reasonably believes to be genuine; or (B) subject to Section 10,
delays or errors or loss of data occurring by reason of
circumstances beyond PFPC's control, including acts of civil or
military authority, national emergencies, labor difficulties,
fire, flood, catastrophe, acts of God, insurrection, war, riots
or failure of the mails, transportation, communication or power
supply.
(c) Notwithstanding anything in this Agreement to the
contrary, neither PFPC nor its affiliates shall be liable to the
Fund for any consequential, special or indirect losses or damages
which the Fund may incur or suffer by or as a consequence of
PFPC's or its affiliates' performance of the services provided
hereunder, whether or not the likelihood of such losses or
damages was known by PFPC or its affiliates.
16. Description of Services.
(a) Itemized Services. PFPC shall:
(i) Calculate 12b-1 payments and payments under
any Shareholder Services Plan of the Fund,
produce and mail statements and checks where
applicable or generate payments through the
National Securities Clearing Corp. (the
"NSCC") to all eligible dealers, and forward
ineligible checks and statements to Aquila
Distributors, Inc. (the "Distributor");
(ii) Make weekly payment of direct commissions,
including settlement through NSCC;
(iii) Establish and maintain proper shareholder
registrations;
(iv) Review new applications for required
information and correspond with shareholders
to complete or correct information;
(v) Provide payment processing of checks or
wires;
(vi) Prepare and certify stockholder lists in
conjunction with proxy solicitations;
(vii) Issue and countersign share certificates
(when requested in writing by a shareholder)
and cancel share certificates;
(viii) Prepare and mail to shareholders confirmation
of activity;
(ix) Provide toll-free lines and voice response
unit for direct shareholder use, plus
customer liaison staff for on-line inquiry
response (generally until 6 p.m., New York
time, on days on which the New York Stock
Exchange is open), including the ability to
receive redirected toll-free calls from the
Distributor on an as-needed basis;
(x) On a monthly basis, mail duplicate statements
to: (1) broker-dealers of their clients'
activity, whether executed through the
broker-dealer or directly with PFPC, and (2)
other parties (e.g., lawyers and accountants)
as requested by the shareholders;
(xi) Provide periodic shareholder lists and
statistics to the Fund;
(xii) Provide detailed data for underwriter/broker
confirmations, including daily outstanding
confirmed purchases, redemptions, and paid
not issued shares;
(xiii) Prepare periodic mailing of year-end tax and
statement information;
(xiv) Provide reports, notification, and where
applicable reconciliation on a timely basis
to the investment adviser, sub-adviser,
administrator, accounting agent, and
custodian of fund activity;
(xv) Perform other participating broker-dealer
shareholder services, including Fund/Serv,
Automated Customer Account Transfer System
("ACATS"), Networking and terminal access for
selected dealers, and such other services as
may be agreed upon from time to time;
(xvi) Promptly transmit to the Fund all reports,
documents and information as are requested by
the Fund and agreed to by PFPC, which
agreement shall not be unreasonably withheld,
that are necessary to enable the Fund and its
service providers to comply with the
requirements of the Internal Revenue Service,
the SEC, the National Association of
Securities Dealers, Inc, the National
Securities Clearing Corp., the state blue sky
authorities and any other regulatory bodies
having jurisdiction over the Fund, it being
understood and agreed that such reports shall
include those on the list contained in
Exhibit B hereto, as such list may be
amended from time to time by agreement
between the parties;
(xvii) Process all clerical transactions;
(xviii) Screen and maintain Transfer on Death
registrations according to Fund guidelines
(except those guidelines hereafter adopted by
the Fund which are considered in PFPC's sole
good-faith discretion to be more burdensome
than the guidelines in effect on the date of
this Agreement);
(xix) Provide electronic imaging and time-stamping
of all incoming mail;
(xx) Compute and track all front-end and
contingent deferred sales charges imposed
upon the purchase and redemption of Shares;
(xxi) Track and convert Shares in accordance with
the share conversion features described in
the prospectus of the Fund;
(xxii) Answer written or telephonic correspondence
relating to its duties hereunder (including
providing written acknowledgement of address
changes to previous addresses of record) and
such other correspondence as may from time to
time be mutually agreed upon between PFPC and
the Fund; inquiries of a non-routine nature
shall be referred to the Fund;
(xxiii) Remit supporting detail of underwriter fees
to the Distributor on a semi-monthly basis;
(xxiv) Until such time as Fund management and legal
counsel to the Fund determine otherwise and
so inform PFPC in Written Instructions,
establish, maintain for the benefit of the
Fund and control the flow of funds through
separate subscription, redemption and
dividend disbursement accounts (each an
"Operational Account") provided by PNC Bank,
N.A. or by such other financial institution
as may be agreed upon by the Fund and PFPC;
(xxv) To the extent reasonably feasible, reverse
trades (including backing out dividends) due
to nonreceipt of funds, improper
registration, or other sufficient reason;
(xxvi) Compute and track all letters of intent;
(xxvii) Screen all transactions with respect to the
Fund's Blue Sky requirements of which PFPC is
informed by the Fund by Written Instructions,
and comply with the Written Instructions of
the Fund in effect from time to time limiting
issuance of Shares to specified states (based
on address of registration), including
screening for Shares sold in states other
than those so specified (but relating only to
those Shares sold after PFPC commences its
duties as transfer agent hereunder);
(xxviii) Provide abandoned property reporting and
filing to meet the escheat requirements of
each of the states named by the Fund in
Written Instructions;
(xxix) Maintain a record of all incoming checks, new
account applications and documentation set
forth in Section 16(g), on filmstrips,
another microfilm retrieval method or
otherwise so as to be retrievable and
reproducible, upon reasonable request, within
time frames that meet reasonable industry
standards;
(xxx) Process W-9 or similar forms received by PFPC
and review taxpayer identification numbers
for all same number (e.g., 888 88 8888),
sequential numbering (e.g., 123 45 6789) and
non-numeric numbers (e.g., 128 4A 3927) and
other conditions of obvious irregularity in
accordance with PFPC's normal operating
procedures;
(xxxi) On a semi-monthly or other basis acceptable
to PFPC and the Fund (but in no event more
frequently than once per month per
shareholder account) initiate, accept and
process pre-authorized checks or, when
available, electronic funds transfers drawn
against shareholders' checking accounts;
(xxxii) In accordance with policies and procedures
established by the Fund and PFPC, furnish to
shareholders dividend and redemption checks
alleged to have been lost, stolen, destroyed
or not received; and
(xxxiii) Record all incoming telephone conversations
and telephonic transactions that are received
via the Fund's published customer service
numbers and retain such recordings for a
minimum of six months.
(xxxiv) Post and perform shareholder transfers and
post and perform exchanges for shares of
other funds with which the Fund has exchange
privileges, pursuant to shareholder
instructions; and
(xxxv) Reconcile to Fund accounting records and pay
dividends and other distributions, including
direct deposit credits through the Automatic
Clearing House ("ACH") upon proper written
shareholder authorization.
(b) Purchase of Shares. PFPC shall issue Shares and
credit an account of an investor, in the manner described in the
Fund's prospectus, once it has screened for blue sky compliance
pursuant to Section 16(a)(xxvii) and Transfer on Death
registration compliance pursuant to Section 16(a)(xviii) and
receives:
(i) A purchase order or application, either
directly from an investor or otherwise,
complying with requirements for purchases
prescribed by the prospectus;
(ii) Proper information to establish a shareholder
account; and
(iii) A purchase check or confirmation of receipt
or crediting of available funds for such
order to the Fund's custodian.
In opening new shareholder accounts, PFPC will assign account
numbers. PFPC shall assign Aquila Distributors, Inc. as broker
of record whenever dealer information is omitted and send a copy
of any related application to Aquila Distributors, Inc.
PFPC must receive a completed application before any
redemption orders are accepted and processed for an account
opened directly by an investor.
(c) Redemption of Shares. PFPC shall redeem Shares
only if that function is properly authorized by the Declaration
of Trust or resolution of the Fund's Board of Trustees. If the
Fund is a money-market fund, PFPC shall arrange, in accordance
with the Fund's prospectus, for a shareholder's redemption of
shares from a shareholder's account with a checkwriting
privilege. Shares shall be redeemed and payment therefor shall
be made in accordance with the Fund's prospectus, including
provisions set forth therein for automatic redemption, telephone
redemption requests and check-writing privileges, when the
recordholder tenders Shares in proper form and amount and
properly directs the method of redemption. If Shares are
received in proper form, Shares shall be redeemed before the
funds are provided to PFPC from the Fund's custodian. If the
recordholder has not directed that redemption proceeds be wired,
when the custodian provides PFPC with funds, a redemption check
shall be sent to and made payable to the recordholder, unless:
(i) the surrendered certificate is drawn to the
order of an assignee or holder and transfer
authorization is signed by the recordholder;
(ii) Transfer authorizations are signed by the
recordholder when Shares are held in
book-entry form;
(iii) Such redemption is through money market fund
check-writing capabilities; or
(iv) such redemption is in settlement of dealer
confirmed redemptions via Fund/Serv.
Consistent with provisions set forth in the prospectus,
redemption proceeds shall be wired upon request. When a
broker-dealer notifies PFPC of a redemption desired by a
customer, and the Fund's custodian provides PFPC with funds, PFPC
shall prepare and send the redemption check to the broker-dealer,
made payable to the broker-dealer on behalf of its customer.
PFPC shall establish procedures reasonably designed to
ensure that redemption requirements established by PFPC and
agreed to by the Fund have been met, including the receipt and
examination of stock certificates and related endorsements,
signature guarantees and obtaining any needed papers or
documents, including a properly completed application, where
required. No redemptions in accounts represented in whole or in
part by certificates shall be effected without cancellation of an
adequate number of certificate Shares, if necessary. No
signature guarantees shall be acceptable if received by facsimile
and signature guarantees must reasonably appear to have been
provided by an eligible guarantor institution of a type described
as such in the prospectus which is a participant in a medallion
program recognized by the Securities Transfer Association or in
instructions received from the Fund; provided, however, that PFPC
may accept a signature guarantee received by facsimile if so
instructed by Oral or Written Instructions.
(d) Dividends and Distributions. Upon receipt of a
resolution of the Fund's Board of Trustees authorizing the
declaration and payment of dividends and distributions, PFPC
shall issue dividends and distributions declared by the Fund in
Shares, or, upon shareholder election, pay such dividends and
distributions in cash, if and as provided for in the Fund's
prospectus. Such issuance or payment, as well as payments upon
redemption as described above, shall be made after deduction and
payment of the required amount of funds to be withheld in
accordance with any applicable tax laws or other laws, rules or
regulations. PFPC shall timely mail to the Fund's shareholders
and appropriate taxing authorities such tax forms and other
information, or permissible substitute notice, relating to
dividends and distributions paid by the Fund as are required to
be filed and mailed by applicable law, rule or regulation. PFPC
shall prepare, maintain and file with the IRS and other
appropriate taxing authorities reports relating to all dividends
paid by the Fund to its shareholders as required by tax or other
law, rule or regulation.
(e) Communications to Shareholders. PFPC shall
address, enclose and mail all communications by the Fund to its
shareholders (pre-sorting where reasonably practicable),
including:
(i) Reports to shareholders;
(ii) Confirmations of purchases and sales of
Shares;
(iii) Monthly or quarterly statements (with extra
print lines for additional information, such
as additional dividend information, to
shareholders), generally by the fifth
business day after the dividend payable date,
providing a combined check and statement to
shareholders electing cash distributions;
(iv) Dividend and distribution notices (at year-
end, such notices will be upon Written
Instructions);
(v) Tax form information (upon Written
Instructions);
(vi) Forms W-9 or W-8 as appropriate;
(vii) Prospectuses;
(viii) Account-related shareholder correspondence
that is considered in PFPC's sole discretion
to be routine; and
(ix) Any other routine shareholder communications
as agreed to between the Fund and PFPC.
(f) Third Party Proxy Provider. PFPC shall assist the
Fund in obtaining competitive bids for proxy services. Proxy
services shall be provided by a third party. The Fund
understands and agrees that PFPC bears no responsibility for the
provision of any proxy services or the manner in which any proxy
services are provided, that PFPC will not be considered the
Fund's agent in connection with the provision of any proxy
services, and that any party providing proxy services to the Fund
shall not be considered to be the agent of PFPC or to have any
other relationship with PFPC with respect to such services. Such
proxy services, which will be decided upon solely between the
Fund and the third party provider, shall include proxy mailing,
receiving and tabulating proxy cards for the meetings of the
Fund's shareholders, communicating to the Fund daily and final
results of such tabulation accompanied by appropriate
certificates, and preparing and furnishing to the Fund certified
lists of shareholders as of such date, and in such form and
containing such information as may be required by the Fund to
comply with any applicable provisions of law or its Declaration
of Trust and/or By-Laws relating to such meetings.
Notwithstanding the foregoing provisions of this Subsection (f),
PFPC shall furnish to the third-party proxy provider such
information as is reasonably requested by such provider
pertaining to shareholder registration information and record-
date share positions to permit the Fund to obtain the benefits of
the services necessary for conduct of its shareholder meetings.
(g) Records. PFPC shall maintain records of the
accounts for each shareholder showing the following information:
(i) Name, address, United States Tax
Identification or Social Security number, and
any pertinent beneficiary information;
(ii) Number and class of Shares held and number
and class of Shares for which certificates,
if any, have been issued, including
certificate numbers and denominations;
(iii) Historical information regarding the account
of each shareholder, including dividends and
distributions paid and the date and price for
all transactions in a shareholder's account;
(iv) Any stop or restraining order placed against
a shareholder's account;
(v) Any correspondence relating to the current
maintenance of a shareholder's account;
(vi) Information with respect to withholdings,
including withholdings in the case of a
foreign account and accounts subject to
backup withholding; and
(vii) Any information required in order for the
transfer agent to perform any calculations
contemplated or required by this Agreement.
PFPC shall use its best efforts to convert for use in
its system such data of the predecessor transfer agent that has
been provided to PFPC as shall permit PFPC to maintain on its
system such converted data covering a minimum of 18 months prior
to commencement of its services as transfer agent of the Fund.
PFPC is not responsible for errors or omissions in or caused by
the records of any predecessor transfer agent. PFPC shall inform
the Fund of material errors coming to its attention in the course
of performance of its duties hereunder. PFPC shall maintain on
its system in a readily viewable form pertinent account
information (i.e., the information listed in this Section 16(g))
relating to shareholders of the Fund (including all predecessor
transfer agent data delivered to PFPC by the Fund's prior
transfer agent in a machine readable format and converted by
PFPC) for a minimum of 13 months after the date of the
transaction or other matter to which the information relates and
shall thereafter maintain such information in a readily
accessible format to the extent required by the 1940 Act and
other applicable securities laws, rules and regulations.
(h) Lost or Stolen Certificates. PFPC shall place a
stop notice against any certificate reported to be lost, stolen,
destroyed or not received and comply with all applicable federal
regulatory requirements for reporting such loss or alleged
misappropriation. A new certificate shall be registered and
issued only upon:
(i) The shareholder's pledge of a lost instrument
bond or such other appropriate indemnity bond
issued by a surety company approved by PFPC;
and
(ii) Completion of a release and indemnification
agreement signed by the shareholder to
protect PFPC and its affiliates.
(i) Shareholder Inspection of Fund Records. Upon a
request from any Fund shareholder to inspect Fund records, PFPC
will notify the Fund and the Fund will issue instructions
granting or denying each such request. Unless PFPC has acted
contrary to the Fund's instructions, the Fund agrees and does
hereby release PFPC from any liability for refusal of permission
for a particular shareholder to inspect the Fund's records.
(j) Withdrawal of Shares and Cancellation of
Certificates. Upon receipt of Written Instructions, PFPC shall
cancel outstanding certificates surrendered by the Fund to reduce
the total amount of outstanding Shares by the number of Shares
surrendered by the Fund.
(k) Fraud Detection Procedures. PFPC shall establish
procedures that are reasonably designed to detect fraudulent
purchase, redemption and distribution checks (including
fraudulent or forged endorsements and altered payment amounts);
however, PFPC shall have no liability for loss resulting from any
fraud perpetrated or attempted to be perpetrated on the Fund,
unless PFPC has acted with willful misfeasance, bad faith,
negligence or reckless disregard of its duties hereunder. Such
procedures shall take into account the type of accounts involved,
the sums involved and cost/benefit considerations.
(l) Third Party Checks. PFPC shall not accept any
third party check (i.e., an investment check whose payee is other
than the Fund or PFPC) except pursuant to Written Instructions.
(m) Relationship Officer. PFPC agrees to provide a
Relationship Officer to serve as the primary point of contact
between the Fund and PFPC. PFPC will exercise due care in
assigning an individual who is conversant with standard
investment company practices.
(n) Additional Services.
(i) PFPC shall, in addition to the services
herein itemized, if so requested by the Fund
and agreed to by PFPC, which shall bargain in
good faith regarding such requests and the
fees and charges to be paid therefor, for
such additional fees and charges as the Fund
and PFPC may from time to time agree, perform
and do all other acts and services as
required by the Fund's prospectus or the law
or that are customarily performed and done by
transfer agents, dividend disbursing agents,
and shareholder servicing agents of open-end
mutual funds such as the Fund.
(ii) PFPC shall, in addition to the services
herein itemized, provide such additional
services to the Fund and in such manner as
are normally provided by PFPC to its mutual
fund transfer agency customers in the normal
course of business, subject to additional
mutually-agreed upon pricing, if any.
(o) Procedures. In order to facilitate the carrying
out of the services set forth in this Agreement, PFPC shall
follow the procedures attached hereto as Exhibit C and PFPC and
the Fund may from time to time mutually agree to changes thereto.
17. Duration and Termination. This Agreement shall
continue until terminated by the Fund on sixty (60) days' prior
written notice or by PFPC on one-hundred-twenty (120) days' prior
written notice to the other party, provided, however, that
without the Fund's consent PFPC shall not for a period of three
years after the date of this Agreement terminate this Agreement
with the intent to enter into a new agreement with the Fund that
provides for higher fees.
18. Notices. All notices and other communications,
including Written Instructions, shall be in writing or by
confirming telegram, cable, telex or facsimile sending device.
Notices shall be addressed (a) if to PFPC, at 400 Bellevue
Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at 380
Madison Avenue, Suite 2300, New York, NY 10017, Attn: President
or (c) if to neither of the foregoing, at such other address as
shall have been given by like notice to the sender of any such
notice or other communication by the other party. If notice is
sent by confirming telegram, cable, telex or facsimile sending
device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have
been given three days after it has been mailed. If notice is
sent by messenger, it shall be deemed to have been given on the
day it is delivered.
19. Amendments. This Agreement, or any term thereof, may
be changed or waived only by a written amendment, signed by the
party against whom enforcement of such change or waiver is
sought.
20. Delegation; Assignment. PFPC may assign its rights and
delegate its duties hereunder only to any wholly-owned direct or
indirect subsidiary of PNC Bank, National Association or PNC Bank
Corp., provided that (i) PFPC gives the Fund thirty (30) days'
prior written notice; (ii) the delegate (or assignee) agrees with
PFPC and the Fund to comply with all relevant provisions of the
1940 Act; and (iii) PFPC and such delegate (or assignee) promptly
provide such information as the Fund may request, and respond to
such questions as the Fund may ask, relative to the delegation
(or assignment), including (without limitation) the capabilities
of the delegate (or assignee).
21. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same
instrument.
22. Further Actions. Each party agrees to perform such
further acts and execute such further documents as are necessary
to effectuate the purposes hereof.
23. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the
entire agreement and understanding between the parties and
supersedes all prior agreements and understandings relating to
the subject matter hereof, provided that the parties may embody
in one or more separate documents their agreement, if any, with
respect to delegated duties and Oral Instructions.
(b) Captions. The captions in this Agreement are
included for convenience of reference only and in no way define
or delimit any of the provisions hereof or otherwise affect their
construction or effect.
(c) Governing Law. This Agreement shall be deemed to
be a contract made in Delaware and governed by Delaware law,
without regard to principles of conflicts of law.
(d) Partial Invalidity. If any provision of this
Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall
not be affected thereby.
(e) Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of
any party to this Agreement shall constitute the valid and
binding execution hereof by such party.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above
written.
PFPC INC.
By: /s/Robert J. Perlsveg
Title: E V P
CHURCHILL TAX-FREE TRUST
By: /s/Diana P. Herrmann
Title: Vice President
<PAGE>
EXHIBIT A
THIS EXHIBIT A, dated as of November 7, 1997, is Exhibit A
to that certain Transfer Agency Services Agreement dated as of
November 7, 1997 between PFPC Inc. and Churchill Tax-Free Trust.
PORTFOLIOS
CHURCHILL TAX-FREE FUND OF KENTUCKY
<PAGE>
AUTHORIZED PERSONS APPENDIX
On the date of the Agreement and thereafter until further
notice, the following persons shall be Authorized Persons as
defined therein:
Name (Type) Signature
Lacy B. Herrmann
Lacy B. Herrmann
William C. Wallace
William C. Wallace
Diana P. Herrmann
Diana P. Herrmann
Charles E. Childs, III
Charles E. Childs, III
John M. Herndon
John M. Herndon
Rose F. Marotta
Rose F. Marotta
Richard F. West
Richard F. West
Patricia A. Craven
Patricia A. Craven
Stephen J. Caridi
Stephen J. Caridi
William Killeen
William Killeen
<PAGE>
Exhibit B
Report List for Aquila Group of Funds
12b-1 Report
5 Percent or More Shareholder Listing
5 Percent or More Shareholder Listing - sorted by ssn
Account Analysis by Type
Asset Report by Dealer for Management Company
Asset Report by Fund and Dealer
Blue Sky Sales Report
Capital Stock Reporting
Daily Transaction Journal
Dealer Commission Check Register/Dealer Commission Statement
DTS Activity Summary
DTS Liquidation Placements
DTS Outstanding Trades by Fund
DTS Posted Transactions
DTS Purchase Placement
Matrix Summary by Fund With Dealer Name
Matrix Summary by Management Company With Dealer Name
Month to Sales (Demographics by Account Group)
Monthly Statistical Report
Monthly Wire Order (Purchases/Redemptions)
New Account Journal
Next Day NSCC Settlement Detail
NSAR Based on trade date
Transactions at a Glance
HOLLYER BRADY SMITH TROXELL
BARRETT ROCKETT HINES & MONE LLP
551 Fifth Avenue
New York, NY 10176
Tel: (212) 818-1110
FAX: (212) 818-0494
e-mail: [email protected]
April 29, 1998
Churchill Tax-Free Trust
380 Madison Avenue, Suite 2300
New York, New York 10017
Ladies and Gentlemen:
You have requested that we render an opinion to
Churchill Tax-Free Fund of Kentucky (the "Fund") the
only operation series of Churchill Tax-Free Trust with
respect to Post-Effective Amendment No. 17 (the
"Amendment") to the Registration Statement of the Fund
under the Securities Act of 1933 (the "1933 Act") and
No. 18 under the Investment Company Act of 1940 (the
"1940 Act") which you propose to file with the
Securities and Exchange Commission (the "Commission").
The purpose of the Amendment is to add a new class of
shares, Financial Intermediary Class Shares ("Class I
Shares"), as well as other changes. The Fund already
has outstanding Class A Shares, Class C Shares and
Class Y Shares.
We have examined originals or copies, identified
to our satisfaction as being true copies, of those
corporate records of the Fund, certificates of public
officials, and other documents and matters as we have
deemed necessary for the purpose of this opinion. We
have assumed without independent verification the
authenticity of the documents submitted to us as
originals and the conformity to the original documents
of all documents submitted to us as copies.
Upon the basis of the foregoing and in reliance
upon such other matters as we deem relevant under the
circumstances, it is our opinion that the Class A
Shares, Class C Shares, Class Y Shares and Class I
Shares of the Fund as described in the Amendment, when
issued and paid for in accordance with the terms set
forth in the prospectus and statement of additional
information of the Fund forming a part of its then
effective Registration Statement as heretofore,
herewith and hereafter amended, will be duly issued,
fully-paid and non-assessable to the extent set forth
therein.
This letter is furnished to you pursuant to your
request and to the requirements imposed upon you under
the 1933 Act and 1940 Act and is intended solely for
your use for the purpose of completing the filing of
the Amendment with the Commission. This letter may not
be used for any other purpose or furnished to or relied
upon by any other persons, or included in any filing
made with any other regulatory authority, without our
prior written consent.
We hereby consent to the filing of this opinion
with the Amendment.
Very truly yours,
HOLLYER BRADY SMITH TROXELL
BARRETT ROCKETT HINES & MONE LLP
/s/W. L. D. Barrett
By:_________________________________
W. L. D. Barrett
Dated: April 1, 1996
CHURCHILL TAX-FREE TRUST
DISTRIBUTION PLAN
1. The Plan. This amended and restated Plan (the "Plan") is
the written plan, contemplated by Rule 12b-1 (the "Rule") under
the Investment Company Act of 1940 (the "1940 Act"), of Churchill
Tax-Free Fund of Kentucky (the "Fund"), a portfolio of Churchill
Tax-Free Trust, a Massachusetts business trust (referred to
herein as the "Business Trust"). Part I of the Plan applies
solely to the Front-Payment Class ("Class A") of shares of the
Fund, Part II solely to the Level-Payment Class ("Class C") and
Part III to all classes.
2. Disinterested Trustees. While any Part of this Plan is in
effect, the selection and nomination of those Trustees of the
Business Trust who are not "interested persons" of the Business
Trust shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others
in such selection and nomination if the final decision on any
such selection and nomination is approved by a majority of such
disinterested Trustees.
Part I
Payments Involving Fund Assets Allocated to Front-Payment Shares
3. Applicability. This Part I of the Plan applies only to the
Front-Payment Class ("Class A") of shares of the Fund (regardless
of whether such class is so designated or is redesignated by some
other name).
4. Definitions for Part I. As used in this Part I of the Plan,
"Qualified Recipients" shall mean broker-dealers or others
selected by Aquila Distributors, Inc. (the "Distributor"),
including but not limited to any principal underwriter of the
Fund, with which the Fund or the Distributor has entered into
written agreements in connection with this Part I ("Class A Plan
Agreements") and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of
the Fund's Front-Payment Shares or servicing of shareholder
accounts with respect to such shares. "Qualified Holdings" shall
mean, as to any Qualified Recipient, all Front-Payment Shares
beneficially owned by such Qualified Recipient, or beneficially
owned by its brokerage customers, other customers, other
contacts, investment advisory clients, or other clients, if the
Qualified Recipient was, in the sole judgment of the Distributor,
instrumental in the purchase and/or retention of such shares
and/or in providing administrative assistance or other services
in relation thereto. "Administrator" shall mean Aquila
Management Corporation or any successor serving as sub-adviser or
administrator of the Fund.
5. Certain Payments Permitted. Subject to the direction and
control of the Board of Trustees of the Fund, the Fund may make
payments ("Class A Permitted Payments") to Qualified Recipients,
which Class A Permitted Payments may be made directly, or through
the Distributor or shareholder servicing agent as disbursing
agent, which may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Plan are not accruable or for any fiscal year
which is not a full fiscal year) 0.15 of 1% of the average annual
net assets of the Fund represented by the Front-Payment Class of
shares. Such payments shall be made only out of the Fund assets
allocable to the Front-Payment Shares. The Distributor shall
have sole authority (i) as to the selection of any Qualified
Recipient or Recipients; (ii) not to select any Qualified
Recipient; and (iii) the amount of Class A Permitted Payments, if
any, to each Qualified Recipient provided that the total Class A
Permitted Payments to all Qualified Recipients do not exceed the
amount set forth above. The Distributor is authorized, but not
directed, to take into account, in addition to any other factors
deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient; (b) the extent to
which the Qualified Recipient has, at its expense, taken steps in
the shareholder servicing area with respect to holders of Front-
Payment Shares, including without limitation, any or all of the
following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
6. Reports. While this Part I is in effect, the Fund's
Distributor shall report at least quarterly to the Fund's
Trustees in writing for their review on the following matters:
(i) all Class A Permitted Payments made under Section 5 of the
Plan, the identity of the Qualified Recipient of each payment,
and the purposes for which the amounts were expended; and (ii)
all fees of the Fund to the Distributor paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Business Trust an accounting, in
form and detail satisfactory to the Board of Trustees, to enable
the Board of Trustees to make the determinations of the fairness
of the compensation paid to such affiliated person, not less
often than annually.
7. Effectiveness, Continuation, Termination and Amendment. To
the extent required by the 1940 Act, this Part I of the Plan has
been approved (i) by a vote of the Trustees, including those
Trustees (the "Independent Trustees") who, at the time of such
vote, were not "interested persons" (as defined in the 1940 Act)
of the Business Trust and had no direct or indirect financial
interest in the operation of this Plan or in any agreements
related to this Plan, with votes cast in person at a meeting
called for the purpose of voting on Part I of the Plan; and (ii)
by a vote of holders of at least a "majority" (as defined in the
1940 Act) of the outstanding voting securities of the Front-
Payment Class (or of any predecessor class or category of shares,
whether or not designated as a class) and a vote of holders of at
least a "majority" (as so defined) of the outstanding voting
securities of the Level-Payment Class and/or of any other class
whose shares are convertible into Front-Payment Shares. This
Part I is effective as of the date first above written and will,
unless terminated as hereinafter provided, continue in effect
until June 30 of each year only so long as such continuance is
specifically approved at least annually by the Fund's Trustees
and its Independent Trustees with votes cast in person at a
meeting called for the purpose of voting on such continuance.
This Part I may be terminated at any time by the vote of a
majority of the Independent Trustees or by shareholder approval
of the class or classes of shares affected by this Part I as set
forth in (ii) above. This Part I may not be amended to increase
materially the amount of payments to be made without shareholder
approval of the class or classes of shares affected by this Part
I as set forth in (ii) above, and all amendments must be approved
in the manner set forth in (i) above.
8. Class A Plan Agreements. In the case of a Qualified
Recipient which is a principal underwriter of the Fund, the Class
A Plan Agreement shall be the agreement contemplated by Section
15(b) of the 1940 Act since each such agreement must be approved
in accordance with, and contain the provisions required by, the
Rule. In the case of Qualified Recipients which are not
principal underwriters of the Fund, the Class A Plan Agreements
with them shall be their agreements with the Distributor with
respect to payments under this Part I, provided, however, that
"Related Agreements" entered into under the distribution plan of
the Fund in effect prior to the effective date of this Part I and
not terminated at or prior to such effective date are deemed to
be "Class A Plan Agreements" for purposes of this Part I and
that, as and to the extent necessary to give effect to this
proviso, defined terms used in such agreements shall be deemed to
have the meanings assigned to their appropriate counterparts in
this Part I and the provisions of such agreements, which shall
otherwise remain in full force and effect, are deemed to be
appropriately modified.
Part II
Payments Involving Fund Assets Allocated to Level-Payment Shares
9. Applicability. This Part II of the Plan applies only to the
Level-Payment Class ("Class C") of shares of the Fund (regardless
of whether such class is so designated or is redesignated by some
other name).
10. Definitions for Part II. As used in this Part II of the
Plan, "Qualified Recipients" shall mean broker-dealers or others
selected by Aquila Distributors, Inc. (the "Distributor"),
including but not limited to any principal underwriter of the
Fund, with which the Fund or the Distributor has entered into
written agreements in connection with this Part II ("Class C Plan
Agreements") and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of
the Fund's Level-Payment Shares or servicing of shareholder
accounts with respect to such shares. "Qualified Holdings" shall
mean, as to any Qualified Recipient, all Level-Payment Shares
beneficially owned by such Qualified Recipient, or beneficially
owned by its brokerage customers, other customers, other
contacts, investment advisory clients, or other clients, if the
Qualified Recipient was, in the sole judgment of the Distributor,
instrumental in the purchase and/or retention of such shares
and/or in providing administrative assistance or other services
in relation thereto. "Administrator" shall mean Aquila
Management Corporation or any successor serving as sub-adviser or
administrator of the Fund.
11. Certain Payments Permitted. Subject to the direction and
control of the Board of Trustees of the Fund, the Fund may make
payments ("Class C Permitted Payments") to Qualified Recipients,
which Class C Permitted Payments may be made directly, or through
the Distributor or shareholder servicing agent as disbursing
agent, which may not exceed, for any fiscal year of the Fund (as
adjusted for any part or parts of a fiscal year during which
payments under the Plan are not accruable or for any fiscal year
which is not a full fiscal year) 0.75 of 1% of the average annual
net assets of the Fund represented by the Level Payment Shares
class of shares. Such payments shall be made only out of the
Fund assets allocable to the Level Payment Shares. The
Distributor shall have sole authority (i) as to the selection of
any Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) the amount of Class C Permitted
Payments, if any, to each Qualified Recipient provided that the
total Class C Permitted Payments to all Qualified Recipients do
not exceed the amount set forth above. The Distributor is
authorized, but not directed, to take into account, in addition
to any other factors deemed relevant by it, the following: (a)
the amount of the Qualified Holdings of the Qualified Recipient;
(b) the extent to which the Qualified Recipient has, at its
expense, taken steps in the shareholder servicing area with
respect to holders of Level Payment Shares, including without
limitation, any or all of the following activities: answering
customer inquiries regarding account status and history, and the
manner in which purchases and redemptions of shares of the Fund
may be effected; assisting shareholders in designating and
changing dividend options, account designations and addresses;
providing necessary personnel and facilities to establish and
maintain shareholder accounts and records; assisting in
processing purchase and redemption transactions; arranging for
the wiring of funds; transmitting and receiving funds in
connection with customer orders to purchase or redeem shares;
verifying and guaranteeing shareholder signatures in connection
with redemption orders and transfers and changes in shareholder
designated accounts; furnishing (either alone or together with
other reports sent to a shareholder by such person) monthly and
year end statements and confirmations of purchases and
redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a
Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.
12. Reports. While this Part II is in effect, the Fund's
Distributor shall report at least quarterly to the Business
Trust's Trustees in writing for their review on the following
matters: (i) all Class C Permitted Payments made under Section
11 of the Plan, the identity of the Qualified Recipient of each
payment, and the purposes for which the amounts were expended;
and (ii) all fees of the Fund to the Distributor paid or accrued
during such quarter. In addition, if any such Qualified
Recipient is an affiliated person, as that term is defined in the
Act, of the Fund, the Adviser, the Administrator or the
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.
13. Effectiveness, Continuation, Termination and Amendment.
This Part II has been approved (i) by a vote of the Trustees,
including the Independent Trustees, with votes cast in person at
a meeting called for the purpose of voting on Part II of the
Plan; and (ii) by a vote of holders of at least a "majority" (as
defined in the 1940 Act) of the outstanding voting securities of
the Level Payment Shares class. This Part II is effective as of
the date first above written and will, unless terminated as
hereinafter provided, continue in effect until June 30 of each
year only so long as such continuance is specifically approved at
least annually by the Business Trust's Trustees and its
Independent Trustees with votes cast in person at a meeting
called for the purpose of voting on such continuance. This Part
II may be terminated at any time by the vote of a majority of the
Independent Trustees or by the vote of the holders of a
"majority" (as defined in the 1940 Act) of the outstanding voting
securities of the Level Payment Shares class. This Part II may
not be amended to increase materially the amount of payments to
be made without shareholder approval of the class or classes of
shares affected by this Part II as set forth in (ii) above, and
all amendments must be approved in the manner set forth in (i)
above.
14. Class C Plan Agreements. In the case of a Qualified
Recipient which is a principal underwriter of the Fund, the Class
C Plan Agreement shall be the agreement contemplated by Section
15(b) of the 1940 Act since each such agreement must be approved
in accordance with, and contain the provisions required by, the
Rule. In the case of Qualified Recipients which are not
principal underwriters of the Fund, the Class C Plan Agreements
with them shall be their agreements with the Distributor with
respect to payments under this Part II, provided, however, that
"Related Agreements" entered into under the distribution plan of
the Fund in effect prior to the effective date of this Part II
and not terminated at or prior to such effective date are deemed
to be "Class C Plan Agreements" for purposes of this Part II and
that, as and to the extent necessary to give effect to this
proviso, defined terms used in such agreements shall be deemed to
have the meanings assigned to their appropriate counterparts in
this Part II and the provisions of such agreements, which shall
otherwise remain in full force and effect, are deemed to be
appropriately modified.
Part III
Defensive Provisions
15. Certain Payments Permitted. Whenever the Administrator of
the Fund (i) makes any payment directly or through the Fund's
Distributor for additional compensation to dealers in connection
with sales of shares of the Fund, which additional compensation
may include payment or partial payment for advertising of the
Fund's shares, payment of travel expenses, including lodging,
incurred in connection with trips taken by qualifying registered
representatives and members of their families to locations within
or outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences, or other items described in the Fund's
prospectus, in amounts that will not exceed the amount of the
sales charges in respect of sales of shares of the Fund effected
through such participating dealers whether retained by the
Distributor or reallowed to participating dealers, or (ii) bears
the costs, not borne by the Distributor, of printing and
distributing all copies of the Fund's prospectuses, statements of
additional information and reports to shareholders which are not
sent to the Fund's shareholders, or the costs of supplemental
sales literature and advertising, such payments are authorized.
It is recognized that, in view of the bearing by the
Administrator of certain distribution expenses, the profits, if
any, of the Administrator are dependent primarily on the
administration fees paid by the Fund to the Administrator and
that its profits, if any, would be less, or losses, if any, would
be increased due to the bearing by it of such expenses. If and to
the extent that any such administration fees paid by the Fund
might, in view of the foregoing, be considered as indirectly
financing any activity which is primarily intended to result in
the sale of shares issued by the Fund, the payment of such fees
is authorized by the Plan.
16. Certain Fund Payments Authorized. If and to the extent that
any of the payments listed below are considered to be "primarily
intended to result in the sale of" shares issued by the Fund
within the meaning of the Rule, such payments are authorized
under this Plan: (i) the costs of the preparation of all reports
and notices to shareholders and the costs of printing and mailing
such reports and notices to existing shareholders, irrespective
of whether such reports or notices contain or are accompanied by
material intended to result in the sale of shares of the Fund or
other funds or other investments; (ii) the costs of the
preparation and setting in type of all prospectuses and
statements of additional information, and the costs of printing
and mailing of all prospectuses and statements of additional
information to existing shareholders; (iii) the costs of the
preparation, printing and mailing of all proxy statements and
proxies, irrespective of whether any such proxy statement
includes any item relating to, or directed toward, the sale of
the Fund's shares; (iv) all legal and accounting fees relating to
the preparation of any such reports, prospectuses, statements of
additional information, proxies and proxy statements; (v) all
fees and expenses relating to the registration or qualification
of the Fund and/or its shares under the securities or "Blue-Sky"
laws of any jurisdiction; (vi) all fees under the Securities Act
of 1933 and the 1940 Act, including fees in connection with any
application for exemption relating to or directed toward the sale
of the Fund's shares; (vii) all fees and assessments of the
Investment Company Institute or any successor organization,
irrespective of whether some of its activities are designed to
provide sales assistance; (viii) all costs of the preparation and
mailing of confirmations of shares sold or redeemed or share
certificates, and reports of share balances; and (ix) all costs
of responding to telephone or mail inquiries of investors.
17. Reports. While Part III of this Plan is in effect, the
Fund's sub-adviser, Administrator or Distributor shall report at
least quarterly to the Business Trust's Trustees in writing for
their review on the following matters: (i) all payments made
under Section 15 of this Plan; (ii) all costs of each item
specified in Section 16 of this Plan (making estimates of such
costs where necessary or desirable) during the preceding calendar
or fiscal quarter; and (iii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter.
18. Effectiveness, Continuation, Termination and Amendment. To
the extent required by the 1940 Act, this Part III of the Plan
has, with respect to each class of shares outstanding, been
approved (i) by a vote of the Trustees of the Business Trust and
of the Independent Trustees, with votes cast in person at a
meeting called for the purpose of voting on this Plan; and (ii)
by a vote of holders of at least a "majority" (as defined in the
1940 Act) of the outstanding voting securities of such class and
a vote of holders of at least a "majority" (as so defined) of the
outstanding voting securities of any class whose shares are
convertible into shares of such class. This Part III is
effective as of the date first above written and will, unless
terminated as hereinafter provided, continue in effect with
respect to each class of shares to which it applies until June 30
of each year only so long as such continuance is specifically
approved with respect to that class at least annually by the
Business Trust's Trustees and its Independent Trustees with votes
cast in person at a meeting called for the purpose of voting on
such continuance. This Part III of the Plan may be terminated at
any time with respect to a given class by the vote of a majority
of the Independent Trustees or by the vote of the holders of a
"majority" (as defined in the 1940 Act) of the outstanding voting
securities of that class. This Part III may not be amended to
increase materially the amount of payments to be made without
shareholder approval as set forth in (ii) above, and all
amendments must be approved in the manner set forth in (i) above.
--------------------------
19. Additional Terms and Conditions. This Plan and each Part of
it shall also be subject to all applicable terms and conditions
of Rule 18f-3 under the Act as now in force or hereafter amended.
Specifically, but without limitation, the provisions of Part III
shall be deemed to be severable, within the meaning of and to the
extent required by Rule 18f-3, with respect to each outstanding
class of shares of the Fund.
Dated: April 1, 1996
CHURCHILL TAX-FREE FUND OF KENTUCKY
SHAREHOLDER SERVICES PLAN
1. The Plan. This Shareholder Services Plan (the "Plan") is the
written plan of CHURCHILL TAX-FREE FUND OF KENTUCKY (the "Fund")
adopted to provide for the payment by the Level-Payment Class of
shares of the Fund of ""service fees" within the meaning of
Article III, Section 26(b)(9) of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. This Plan
applies only to the Level-Payment Class ("Class C") of shares of
the Fund (regardless of whether such class is so designated or is
redesignated by some other name).
2. Definitions. As used in this Plan, "Qualified Recipients"
shall mean broker-dealers or others selected by Aquila
Distributors, Inc. (the "Distributor"), including but not limited
to the Distributor and any other principal underwriter of the
Fund, who have, pursuant to written agreements with the Fund or
the Distributor, agreed to provide personal services to Level-
Payment shareholders and/or maintenance of Level-Payment
shareholder accounts. "Qualified Holdings" shall mean, as to any
Qualified Recipient, all Level-Payment Shares beneficially owned
by such Qualified Recipient's customers, clients or other
contacts. "Administrator" shall mean Aquila Management
Corporation or any successor serving as sub-adviser or
administrator of the Fund.
3. Certain Payments Permitted. Subject to the direction and
control of the Board of Trustees of the Fund, the Fund may make
payments ("Service Fees") to Qualified Recipients, which Service
Fees (i) may be paid directly or through the Distributor or
shareholder servicing agent as disbursing agent and (ii) may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year) 0.25 of 1% of the average annual net assets of the
Fund represented by the Level-Payment Class of shares. Such
payments shall be made only out of the Fund assets allocable to
the Level-Payment Shares. The Distributor shall have sole
authority with respect to the selection of any Qualified
Recipient or Recipients and the amount of Service Fees, if any,
paid to each Qualified Recipient, provided that the total Service
Fees paid to all Qualified Recipients may not exceed the amount
set forth above and provided, further, that no Qualified
Recipient may receive more than 0.25 of 1% of the average annual
net asset value of shares sold by such Recipient. The
Distributor is authorized, but not directed, to take into
account, in addition to any other factors deemed relevant by it,
the following: (a) the amount of the Qualified Holdings of the
Qualified Recipient and (b) the extent to which the Qualified
Recipient has, at its expense, taken steps in the shareholder
servicing area with respect to holders of Level-Payment Shares,
including without limitation, any or all of the following
activities: answering customer inquiries regarding account status
and history, and the manner in which purchases and redemptions of
shares of the Fund may be effected; assisting shareholders in
designating and changing dividend options, account designations
and addresses; providing necessary personnel and facilities to
establish and maintain shareholder accounts and records;
assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving
funds in connection with customer orders to purchase or redeem
shares; verifying and guaranteeing shareholder signatures in
connection with redemption orders and transfers and changes in
shareholder designated accounts; and providing such other related
services as the Distributor or a shareholder may request from
time to time. Notwithstanding the foregoing two sentences, a
majority of the Independent Trustees (as defined below) may
remove any person as a Qualified Recipient. Amounts within the
above limits accrued to a Qualified Recipient but not paid during
a fiscal year may be paid thereafter; if less than the full
amount is accrued to all Qualified Recipients, the difference
will not be carried over to subsequent years.
4. Reports. While this Plan is in effect, the Fund's
Distributor shall report at least quarterly to the Fund's
Trustees in writing for their review on the following matters:
(i) all Service Fees paid under the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor paid or accrued during such quarter. In addition, if
any Qualified Recipient is an "affiliated person," as that term
is defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), of the Fund, the Adviser, the Administrator or the
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.
5. Effectiveness, Continuation, Termination and Amendment. This
Plan has been approved by a vote of the Trustees, including those
Trustees who, at the time of such vote, were not "interested
persons" (as defined in the 1940 Act) of the Fund and had no
direct or indirect financial interest in the operation of this
Plan or in any agreements related to this Plan (the "Independent
Trustees"), with votes cast in person at a meeting called for the
purpose of voting on this Plan. It is effective as of the date
first above written and will continue in effect for a period of
more than one year from such date only so long as such
continuance is specifically approved at least annually as set
forth in the preceding sentence. It may be amended in like
manner and may be terminated at any time by vote of the
Independent Trustees.
6. Additional Terms and Conditions. (a) This Plan shall also be
subject to all applicable terms and conditions of Rule 18f-3
under the Act as now in force or hereafter amended.
(b) While this Plan is in effect, the selection and nomination
of those Trustees of the Fund who are not "interested persons" of
the Fund, as that term is defined in the 1940 Act, shall be
committed to the discretion of such disinterested Trustees.
Nothing herein shall prevent the involvement of others in such
selection and nomination if the final decision on any such
selection and nomination is approved by a majority of such
disinterested Trustees.
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class A Shares)
1-YR AVG. TOTAL RETURN AS OF 12/31/97 3.75%
1-YR CUM. TOTAL RETURN AS OF 12/31/97 3.75%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $10.55 As of 12/31/96
Public Offering Price Per Share (POP) $10.99 As of 12/31/96
Number of Shares Purchased 90.992 Based on POP
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
JANUARY 1997 1,000.00 90.992 0.04332891 * 3.94
FEBRUARY 1997 955.72 91.369 0.04627397 4.23
MARCH 1997 971.82 91.768 0.04744845 4.35
APRIL 1997 958.74 92.187 0.05072392 4.68
MAY 1997 960.65 92.638 0.04707200 4.36
JUNE 1997 974.28 93.054 0.04683772 4.36
JULY 1997 987.94 93.466 0.04775968 4.46
AUGUST 1997 1,004.55 93.884 0.04583321 4.30
SEPTEMBER 1997 999.47 94.290 0.04556339 4.30
OCTOBER 1997 1,011.31 94.692 0.04689972 4.44
NOVEMBER 1997 1,016.70 95.107 0.04825164 4.59
DECEMBER 27, 1997** 1,024.14 95.535 0.04241100 4.05
DECEMBER 31, 1997 1,036.79 95.910 0.00754308 0.72
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
JANUARY 1997 10.46 0.377 955.72 -4.43%
FEBRUARY 1997 10.59 0.399 971.82 -2.82%
MARCH 1997 10.40 0.419 958.74 -4.13%
APRIL 1997 10.37 0.451 960.65 -3.93%
MAY 1997 10.47 0.416 974.28 -2.57%
JUNE 1997 10.57 0.412 987.94 -1.21%
JULY 1997 10.70 0.417 1,004.55 0.46%
AUGUST 1997 10.60 0.406 999.47 -0.05%
SEPTEMBER 1997 10.68 0.402 1,011.31 1.13%
OCTOBER 1997 10.69 0.415 1,016.70 1.67%
NOVEMBER 1997 10.72 0.428 1,024.14 2.41%
DECEMBER 27, 1997** 10.81 0.375 1,036.79 3.68%
DECEMBER 31, 1997 10.81 0.067 1,037.51 3.75%
<FN>
* For the period 1/1/97-1/27/97
</FN>
<FN>
** Record Date
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class C Shares)
1-YR AVG. TOTAL RETURN AS OF 12/31/97 6.11%
1-YR CUM. TOTAL RETURN AS OF 12/31/97 6.11%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $10.55 As of 12/31/96
Number of Shares Purchased 94.787 Based on NAV
Includes CDSC of 1% at end of period
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
JANUARY 1997 1,000.00 94.787 0.03648839 * 3.46
FEBRUARY 1997 994.93 95.117 0.03911161 3.72
MARCH 1997 1,011.01 95.469 0.03997977 3.82
APRIL 1997 997.65 95.835 0.04298493 4.12
MAY 1997 997.93 96.233 0.03964537 3.82
JUNE 1997 1,011.37 96.597 0.03935093 3.80
JULY 1997 1,024.83 96.957 0.04002859 3.88
AUGUST 1997 1,041.32 97.319 0.03839579 3.74
SEPTEMBER 1997 1,035.32 97.672 0.03810463 3.72
OCTOBER 1997 1,046.86 98.020 0.03910956 3.83
NOVEMBER 1997 1,051.67 98.379 0.04027602 3.96
DECEMBER 27, 1997** 1,057.60 98.749 0.03534376 3.49
DECEMBER 31, 1997 1,070.97 99.072 0.00628481 0.62
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
JANUARY 1997 10.46 0.331 994.93 -0.51%
FEBRUARY 1997 10.59 0.351 1,011.01 1.10%
MARCH 1997 10.41 0.367 997.65 -0.24%
APRIL 1997 10.37 0.397 997.93 -0.21%
MAY 1997 10.47 0.364 1,011.37 1.14%
JUNE 1997 10.57 0.360 1,024.83 2.48%
JULY 1997 10.70 0.363 1,041.32 4.13%
AUGUST 1997 10.60 0.353 1,035.32 3.53%
SEPTEMBER 1997 10.68 0.348 1,046.86 4.69%
OCTOBER 1997 10.69 0.359 1,051.67 5.17%
NOVEMBER 1997 10.71 0.370 1,057.60 5.76%
DECEMBER 27, 1997** 10.81 0.323 1,070.97 7.10%
DECEMBER 31, 1997 10.7045 0.058 1,061.14 6.11%
<FN>
* For the period 1/1/97-1/27/97
</FN>
<FN>
** Record Date
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N N A V
Churchill Tax-Free Fund of Kentucky (Class Y Shares)
1-YR AVG. TOTAL RETURN AS OF 12/31/97 8.34%
1-YR CUM. TOTAL RETURN AS OF 12/31/97 8.34%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $10.55 As of 12/31/96
Number of Shares Purchased 94.787 Based on NAV
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
JANUARY 1997 1,000.00 94.787 0.05103496 4.84
FEBRUARY 1997 1,001.05 95.247 0.04590056 4.37
MARCH 1997 1,009.23 95.661 0.05037598 4.82
APRIL 1997 1,000.65 96.124 0.04883800 4.69
MAY 1997 1,006.31 96.575 0.05005317 4.83
JUNE 1997 1,018.87 97.035 0.04836911 4.69
JULY 1997 1,028.42 97.480 0.04920131 4.80
AUGUST 1997 1,050.76 97.927 0.04883830 4.78
SEPTEMBER 1997 1,044.77 98.377 0.04705365 4.63
OCTOBER 1997 1,055.30 98.811 0.04819268 4.76
NOVEMBER 1997 1,062.04 99.256 0.04649065 4.61
DECEMBER 1997 1,068.64 99.686 0.04832543 4.82
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
JANUARY 1997 10.51 0.460 1,001.05 0.10%
FEBRUARY 1997 10.55 0.414 1,009.23 0.92%
MARCH 1997 10.41 0.463 1,000.65 0.07%
APRIL 1997 10.42 0.451 1,006.31 0.63%
MAY 1997 10.50 0.460 1,018.87 1.89%
JUNE 1997 10.55 0.445 1,028.42 2.84%
JULY 1997 10.73 0.447 1,050.76 5.08%
AUGUST 1997 10.62 0.450 1,044.77 4.48%
SEPTEMBER 1997 10.68 0.433 1,055.30 5.53%
OCTOBER 1997 10.70 0.445 1,062.04 6.20%
NOVEMBER 1997 10.72 0.430 1,068.64 6.86%
DECEMBER 1997 10.82 0.445 1,083.42 8.34%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class A Shares)
5-YEAR AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/97 5.60%
5-YEAR CUMULATIVE TOTAL RETURN AS OF 12/31/97 31.31%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $10.50 As of 12/31/92
Public Offering Price Per Share (POP) $10.94 As of 12/31/92
Number of Shares Purchased 91.408 Based on POP
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
JANUARY 1993 1,000.00 91.408 0.047451 4.34
FEBRUARY 1993 968.69 91.819 0.052783 4.85
MARCH 1993 998.33 92.267 0.052377 4.83
APRIL 1993 989.32 92.720 0.051539 4.78
MAY 1993 998.73 93.165 0.051329 4.78
JUNE 1993 1,006.31 93.610 0.051987 4.87
JULY 1993 1,018.67 94.060 0.049801 4.68
AUGUST 1993 1,018.65 94.494 0.049507 4.68
SEPTEMBER 1993 1,036.55 94.923 0.052014 4.94
OCTOBER 1993 1,049.09 95.371 0.050357 4.80
NOVEMBER 1993 1,048.17 95.810 0.049596 4.75
DECEMBER 1993 1,041.42 96.250 0.082503 7.94
JANUARY 1994 1,058.99 96.977 0.047819 4.64
FEBRUARY 1994 1,063.62 97.401 0.049937 4.86
MARCH 1994 1,049.01 97.855 0.048496 4.75
APRIL 1994 1,034.18 98.306 0.051396 5.05
MAY 1994 1,025.47 98.793 0.049902 4.93
JUNE 1994 1,027.44 99.269 0.049612 4.92
JULY 1994 1,032.36 99.745 0.051104 5.10
AUGUST 1994 1,037.46 100.238 0.050692 5.08
SEPTEMBER 1994 1,041.54 100.729 0.052676 5.31
OCTOBER 1994 1,035.76 101.248 0.047972 4.86
NOVEMBER 1994 1,024.42 101.730 0.051432 5.23
DECEMBER 1994 1,000.15 102.265 0.052587 5.38
JANUARY 1995 1,024.96 102.804 0.050239 5.16
FEBRUARY 1995 1,043.49 103.316 0.048672 5.03
MARCH 1995 1,072.28 103.803 0.052056 5.40
APRIL 1995 1,085.99 104.322 0.050105 5.23
MAY 1995 1,091.22 104.824 0.050176 5.26
JUNE 1995 1,108.01 105.324 0.051496 5.42
JULY 1995 1,113.43 105.839 0.050894 5.39
AUGUST 1995 1,110.35 106.355 0.052229 5.55
SEPTEMBER 1995 1,114.84 106.888 0.048173 5.15
OCTOBER 1995 1,122.13 107.381 0.047544 5.11
NOVEMBER 1995 1,140.12 107.864 0.049274 5.31
DECEMBER 1995 1,151.91 108.364 0.047955 5.20
JANUARY 1996 1,163.60 108.850 0.048283 5.26
FEBRUARY 1996 1,167.77 109.342 0.049612 5.42
MARCH 1996 1,166.63 109.853 0.048473 5.32
APRIL 1996 1,155.48 110.361 0.048277 5.33
MAY 1996 1,157.50 110.872 0.051348 5.69
JUNE 1996** 1,165.41 111.416 0.046624 5.19
JULY 1996 1,161.69 111.916 0.04781339 5.35
AUGUST 1996 1,173.76 112.429 0.04963130 5.58
SEPTEMBER 1996 1,180.46 112.963 0.04970831 5.62
OCTOBER 1996 1,189.47 113.499 0.05126172 5.82
NOVEMBER 1996 1,194.15 114.054 0.04799971 5.47
DECEMBER 1996 1,214.45 114.571 0.04802775 5.50
JANUARY 1997 1,216.52 115.091 0.04971435 5.72
FEBRUARY 1997 1,209.58 115.638 0.04627397 5.35
MARCH 1997 1,229.96 116.144 0.04744845 5.51
APRIL 1997 1,213.40 116.674 0.05072392 5.92
MAY 1997 1,215.82 117.244 0.04707200 5.52
JUNE 1997 1,233.07 117.771 0.04683772 5.52
JULY 1997 1,250.36 118.293 0.04775968 5.65
AUGUST 1997 1,271.39 118.821 0.04583321 5.45
SEPTEMBER 1997 1,264.95 119.335 0.04556339 5.44
OCTOBER 1997 1,279.93 119.844 0.04689972 5.62
NOVEMBER 1997 1,286.75 120.370 0.04825164 5.81
DECEMBER 26, 1997 1,296.17 120.912 0.04241100 5.13
DECEMBER 31, 1997 1,312.18 121.386 0.00754308 0.92
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
JANUARY 1993 10.55 0.411 968.69 -3.13%
FEBRUARY 1993 10.82 0.448 998.33 -0.17%
MARCH 1993 10.67 0.453 989.32 -1.07%
APRIL 1993 10.72 0.446 998.73 -0.13%
MAY 1993 10.75 0.445 1,006.31 0.63%
JUNE 1993 10.83 0.449 1,018.67 1.87%
JULY 1993 10.78 0.435 1,018.65 1.86%
AUGUST 1993 10.92 0.428 1,036.55 3.66%
SEPTEMBER 1993 11.00 0.449 1,049.09 4.91%
OCTOBER 1993 10.94 0.439 1,048.17 4.82%
NOVEMBER 1993 10.82 0.439 1,041.42 4.14%
DECEMBER 1993 10.92 0.727 1,058.99 5.90%
JANUARY 1994 10.92 0.425 1,063.62 6.36%
FEBRUARY 1994 10.72 0.454 1,049.01 4.90%
MARCH 1994 10.52 0.451 1,034.18 3.42%
APRIL 1994 10.38 0.487 1,025.47 2.55%
MAY 1994 10.35 0.476 1,027.44 2.74%
JUNE 1994 10.35 0.476 1,032.36 3.24%
JULY 1994 10.35 0.493 1,037.46 3.75%
AUGUST 1994 10.34 0.491 1,041.54 4.15%
SEPTEMBER 1994 10.23 0.519 1,035.76 3.58%
OCTOBER 1994 10.07 0.482 1,024.42 2.44%
NOVEMBER 1994 9.78 0.535 1,000.15 0.02%
DECEMBER 1994 9.97 0.539 1,024.96 2.50%
JANUARY 1995 10.10 0.511 1,043.49 4.35%
FEBRUARY 1995 10.33 0.487 1,072.28 7.23%
MARCH 1995 10.41 0.519 1,085.99 8.60%
APRIL 1995 10.41 0.502 1,091.22 9.12%
MAY 1995 10.52 0.500 1,108.01 10.80%
JUNE 1995 10.52 0.516 1,113.43 11.34%
JULY 1995 10.44 0.516 1,110.35 11.03%
AUGUST 1995 10.43 0.533 1,114.84 11.48%
SEPTEMBER 1995 10.45 0.493 1,122.13 12.21%
OCTOBER 1995 10.57 0.483 1,140.12 14.01%
NOVEMBER 1995 10.63 0.500 1,151.91 15.19%
DECEMBER 1995 10.69 0.486 1,163.60 16.36%
JANUARY 1996 10.68 0.492 1,167.77 16.78%
FEBRUARY 1996 10.62 0.511 1,166.63 16.66%
MARCH 1996 10.47 0.509 1,155.48 15.55%
APRIL 1996 10.44 0.510 1,157.50 15.75%
MAY 1996 10.46 0.544 1,165.41 16.54%
JUNE 1996** 10.38 0.500 1,161.69 16.17%
JULY 1996 10.44 0.513 1,173.76 17.38%
AUGUST 1996 10.45 0.534 1,180.46 18.05%
SEPTEMBER 1996 10.48 0.536 1,189.47 18.95%
OCTOBER 1996 10.47 0.556 1,194.15 19.41%
NOVEMBER 1996 10.60 0.516 1,214.45 21.44%
DECEMBER 1996 10.57 0.521 1,216.52 21.65%
JANUARY 1997 10.46 0.547 1,209.58 20.96%
FEBRUARY 1997 10.59 0.505 1,229.96 23.00%
MARCH 1997 10.40 0.530 1,213.40 21.34%
APRIL 1997 10.37 0.571 1,215.82 21.58%
MAY 1997 10.47 0.527 1,233.07 23.31%
JUNE 1997 10.57 0.522 1,250.36 25.04%
JULY 1997 10.70 0.528 1,271.39 27.14%
AUGUST 1997 10.60 0.514 1,264.95 26.50%
SEPTEMBER 1997 10.68 0.509 1,279.93 27.99%
OCTOBER 1997 10.69 0.526 1,286.75 28.68%
NOVEMBER 1997 10.72 0.542 1,296.17 29.62%
DECEMBER 26, 1997 10.81 0.474 1,312.18 31.22%
DECEMBER 31, 1997 10.81 0.085 1,313.10 31.31%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class A Shares)
10-YEAR AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/97 7.73%
10-YEAR CUMULATIVE TOTAL RETURN AS OF 12/31/97 110.53%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $9.26 As of 12/31/88
Public Offering Price Per Share (POP) $9.65 As of 12/31/88
Number of Shares Purchased 103.627 Based on POP
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
JANUARY 1988 1,000.00 103.627 0.053940 5.59
FEBRUARY 1988 1,001.44 104.209 0.057604 6.00
MARCH 1988 1,009.53 104.832 0.058439 6.13
APRIL 1988 1,002.03 105.477 0.053957 5.69
MAY 1988 1,000.34 106.080 0.058504 6.21
JUNE 1988 991.69 106.748 0.055805 5.96
JULY 1988 1,023.27 107.373 0.053190 5.71
AUGUST 1988 1,026.83 107.974 0.061112 6.60
SEPTEMBER 1988 1,036.67 108.666 0.056947 6.19
OCTOBER 1988 1,053.73 109.308 0.058563 6.40
NOVEMBER 1988 1,069.96 109.966 0.055419 6.09
DECEMBER 1988 1,058.46 110.602 0.056418 6.24
JANUARY 1989 1,060.28 111.257 0.061210 6.81
FEBRUARY 1989 1,086.00 111.959 0.052683 5.90
MARCH 1989 1,078.47 112.575 0.059389 6.69
APRIL 1989 1,081.78 113.275 0.053295 6.04
MAY 1989 1,102.54 113.899 0.063296 7.21
JUNE 1989 1,137.08 114.625 0.054248 6.22
JULY 1989 1,150.18 115.248 0.052421 6.04
AUGUST 1989 1,160.83 115.851 0.061110 7.08
SEPTEMBER 1989 1,159.80 116.563 0.055161 6.43
OCTOBER 1989 1,151.08 117.218 0.055415 6.50
NOVEMBER 1989 1,166.95 117.874 0.062168 7.33
DECEMBER 1989 1,183.71 118.608 0.054353 6.45
JANUARY 1990 1,200.83 119.248 0.055770 6.65
FEBRUARY 1990 1,197.94 119.914 0.060087 7.21
MARCH 1990 1,195.55 120.641 0.052409 6.32
APRIL 1990 1,201.87 121.279 0.056486 6.85
MAY 1990 1,199.02 121.976 0.054723 6.67
JUNE 1990 1,209.36 122.653 0.057525 7.06
JULY 1990 1,222.55 123.365 0.056358 6.95
AUGUST 1990 1,238.13 124.061 0.056115 6.96
SEPTEMBER 1990 1,230.21 124.768 0.056590 7.06
OCTOBER 1990 1,233.53 125.486 0.059042 7.41
NOVEMBER 1990 1,233.41 126.244 0.059346 7.49
DECEMBER 1990 1,259.83 126.999 0.055687 7.07
JANUARY 1991 1,277.07 127.707 0.054984 7.02
FEBUARY 1991 1,284.09 128.409 0.058176 7.47
MARCH 1991 1,303.11 129.149 0.054287 7.01
APRIL 1991 1,295.92 129.852 0.055706 7.23
MAY 1991 1,309.65 130.573 0.053170 6.94
JUNE 1991 1,320.51 131.263 0.057324 7.52
JULY 1991 1,322.78 132.014 0.056721 7.49
AUGUST 1991 1,343.47 132.754 0.058162 7.72
SEPTEMBER 1991 1,356.50 133.514 0.054428 7.27
OCTOBER 1991 1,374.45 134.223 0.054165 7.27
NOVEMBER 1991 1,385.75 134.931 0.055940 7.55
DECEMBER 1991 1,390.59 135.668 0.056192 7.62
JANUARY 1992 1,411.78 136.404 0.058545 7.99
FEBRUARY 1992 1,427.95 137.171 0.055253 7.58
MARCH 1992 1,425.93 137.904 0.054719 7.55
APRIL 1992 1,427.96 138.637 0.055378 7.68
MAY 1992 1,439.80 139.380 0.053951 7.52
JUNE 1992 1,454.29 140.105 0.053915 7.55
JULY 1992 1,477.25 140.825 0.056628 7.97
AUGUST 1992 1,520.43 141.567 0.054246 7.68
SEPTEMBER 1992 1,501.21 142.295 0.053782 7.65
OCTOBER 1992 1,513.14 143.019 0.054701 7.82
NOVEMBER 1992 1,490.93 143.773 0.052748 7.58
DECEMBER 1992 1,524.39 144.492 0.144595 20.89
JANUARY 1993 1,536.61 146.484 0.052665 7.71
FEBRUARY 1993 1,553.12 147.215 0.052783 7.77
MARCH 1993 1,600.63 147.933 0.052377 7.75
APRIL 1993 1,586.19 148.659 0.051539 7.66
MAY 1993 1,601.29 149.374 0.051329 7.67
JUNE 1993 1,613.44 150.087 0.051987 7.80
JULY 1993 1,633.24 150.807 0.049801 7.51
AUGUST 1993 1,633.21 151.504 0.049507 7.50
SEPTEMBER 1993 1,661.93 152.191 0.052014 7.92
OCTOBER 1993 1,682.02 152.911 0.050357 7.70
NOVEMBER 1993 1,680.54 153.615 0.049596 7.62
DECEMBER 1993 1,669.73 154.319 0.082503 12.73
JANUARY 1994 1,697.89 155.485 0.047819 7.44
FEBRUARY 1994 1,705.33 156.165 0.049937 7.80
MARCH 1994 1,681.89 156.893 0.048496 7.61
APRIL 1994 1,658.12 157.616 0.051396 8.10
MAY 1994 1,644.16 158.397 0.049902 7.90
JUNE 1994 1,647.31 159.160 0.049612 7.90
JULY 1994 1,655.21 159.923 0.051104 8.17
AUGUST 1994 1,663.38 160.713 0.050692 8.15
SEPTEMBER 1994 1,669.92 161.501 0.052676 8.51
OCTOBER 1994 1,660.66 162.332 0.047972 7.79
NOVEMBER 1994 1,642.47 163.106 0.051432 8.39
DECEMBER 1994 1,603.56 163.963 0.052587 8.62
JANUARY 1995 1,643.34 164.828 0.050239 8.28
FEBRUARY 1995 1,673.05 165.648 0.048672 8.06
MARCH 1995 1,719.21 166.429 0.052056 8.66
APRIL 1995 1,741.19 167.261 0.050105 8.38
MAY 1995 1,749.57 168.066 0.050176 8.43
JUNE 1995 1,776.49 168.868 0.051496 8.70
JULY 1995 1,785.18 169.694 0.050894 8.64
AUGUST 1995 1,780.24 170.521 0.052229 8.91
SEPTEMBER 1995 1,787.44 171.375 0.048173 8.26
OCTOBER 1995 1,799.13 172.165 0.047544 8.19
NOVEMBER 1995 1,827.97 172.940 0.049274 8.52
DECEMBER 1995 1,846.87 173.741 0.047955 8.33
JANUARY 1996 1,865.63 174.521 0.048283 8.43
FEBRUARY 1996 1,872.31 175.310 0.049612 8.70
MARCH 1996 1,870.49 176.129 0.048473 8.54
APRIL 1996 1,852.60 176.944 0.048277 8.54
MAY 1996 1,855.84 177.762 0.051348 9.13
JUNE 1996 1,868.52 178.635 0.046624 8.33
JULY 1996 1,862.56 179.437 0.04781339 8.58
AUGUST 1996 1,881.91 180.259 0.04963130 8.95
SEPTEMBER 1996 1,892.65 181.115 0.04970831 9.00
OCTOBER 1996 1,907.09 181.974 0.05126172 9.33
NOVEMBER 1996 1,914.60 182.865 0.04799971 8.78
DECEMBER 1996 1,947.15 183.693 0.04802775 8.82
JANUARY 1997 1,950.46 184.528 0.04971435 9.17
FEBRUARY 1997 1,939.34 185.405 0.04627397 8.58
MARCH 1997 1,972.02 186.215 0.04744845 8.84
APRIL 1997 1,945.47 187.065 0.05072392 9.49
MAY 1997 1,949.35 187.980 0.04707200 8.85
JUNE 1997 1,977.00 188.825 0.04683772 8.84
JULY 1997 2,004.72 189.662 0.04775968 9.06
AUGUST 1997 2,038.44 190.508 0.04583321 8.73
SEPTEMBER 1997 2,028.12 191.332 0.04556339 8.72
OCTOBER 1997 2,052.14 192.148 0.04689972 9.01
NOVEMBER 1997 2,063.08 192.991 0.04825164 9.31
DECEMBER 26, 1997 2,078.18 193.860 0.04241100 8.22
DECEMBER 31, 1997 2,103.85 194.620 0.00754308 1.47
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
JANUARY 1988 9.61 0.582 1,001.44 0.14%
FEBRUARY 1988 9.63 0.623 1,009.53 0.95%
MARCH 1988 9.50 0.645 1,002.03 0.20%
APRIL 1988 9.43 0.604 1,000.34 0.03%
MAY 1988 9.29 0.668 991.69 -0.83%
JUNE 1988 9.53 0.625 1,023.27 2.33%
JULY 1988 9.51 0.601 1,026.83 2.68%
AUGUST 1988 9.54 0.692 1,036.67 3.67%
SEPTEMBER 1988 9.64 0.642 1,053.73 5.37%
OCTOBER 1988 9.73 0.658 1,069.96 7.00%
NOVEMBER 1988 9.57 0.637 1,058.46 5.85%
DECEMBER 1988 9.53 0.655 1,060.28 6.03%
JANUARY 1989 9.70 0.702 1,086.00 8.60%
FEBRUARY 1989 9.58 0.616 1,078.47 7.85%
MARCH 1989 9.55 0.700 1,081.78 8.18%
APRIL 1989 9.68 0.624 1,102.54 10.25%
MAY 1989 9.92 0.727 1,137.08 13.71%
JUNE 1989 9.98 0.623 1,150.18 15.02%
JULY 1989 10.02 0.603 1,160.83 16.08%
AUGUST 1989 9.95 0.712 1,159.80 15.98%
SEPTEMBER 1989 9.82 0.655 1,151.08 15.11%
OCTOBER 1989 9.90 0.656 1,166.95 16.69%
NOVEMBER 1989 9.98 0.734 1,183.71 18.37%
DECEMBER 1989 10.07 0.640 1,200.83 20.08%
JANUARY 1990 9.99 0.666 1,197.94 19.79%
FEBRUARY 1990 9.91 0.727 1,195.55 19.56%
MARCH 1990 9.91 0.638 1,201.87 20.19%
APRIL 1990 9.83 0.697 1,199.02 19.90%
MAY 1990 9.86 0.677 1,209.36 20.94%
JUNE 1990 9.91 0.712 1,222.55 22.25%
JULY 1990 9.98 0.697 1,238.13 23.81%
AUGUST 1990 9.86 0.706 1,230.21 23.02%
SEPTEMBER 1990 9.83 0.718 1,233.53 23.35%
OCTOBER 1990 9.77 0.758 1,233.41 23.34%
NOVEMBER 1990 9.92 0.755 1,259.83 25.98%
DECEMBER 1990 10.00 0.707 1,277.07 27.71%
JANUARY 1991 10.00 0.702 1,284.09 28.41%
FEBUARY 1991 10.09 0.740 1,303.11 30.31%
MARCH 1991 9.98 0.703 1,295.92 29.59%
APRIL 1991 10.03 0.721 1,309.65 30.96%
MAY 1991 10.06 0.690 1,320.51 32.05%
JUNE 1991 10.02 0.751 1,322.78 32.28%
JULY 1991 10.12 0.740 1,343.47 34.35%
AUGUST 1991 10.16 0.760 1,356.50 35.65%
SEPTEMBER 1991 10.24 0.710 1,374.45 37.44%
OCTOBER 1991 10.27 0.708 1,385.75 38.57%
NOVEMBER 1991 10.25 0.736 1,390.59 39.06%
DECEMBER 1991 10.35 0.737 1,411.78 41.18%
JANUARY 1992 10.41 0.767 1,427.95 42.80%
FEBRUARY 1992 10.34 0.733 1,425.93 42.59%
MARCH 1992 10.30 0.733 1,427.96 42.80%
APRIL 1992 10.33 0.743 1,439.80 43.98%
MAY 1992 10.38 0.724 1,454.29 45.43%
JUNE 1992 10.49 0.720 1,477.25 47.73%
JULY 1992 10.74 0.743 1,520.43 52.04%
AUGUST 1992 10.55 0.728 1,501.21 50.12%
SEPTEMBER 1992 10.58 0.723 1,513.14 51.31%
OCTOBER 1992 10.37 0.754 1,490.93 49.09%
NOVEMBER 1992 10.55 0.719 1,524.39 52.44%
DECEMBER 1992 10.49 1.992 1,536.61 53.66%
JANUARY 1993 10.55 0.731 1,553.12 55.31%
FEBRUARY 1993 10.82 0.718 1,600.63 60.06%
MARCH 1993 10.67 0.726 1,586.19 58.62%
APRIL 1993 10.72 0.715 1,601.29 60.13%
MAY 1993 10.75 0.713 1,613.44 61.34%
JUNE 1993 10.83 0.720 1,633.24 63.32%
JULY 1993 10.78 0.697 1,633.21 63.32%
AUGUST 1993 10.92 0.687 1,661.93 66.19%
SEPTEMBER 1993 11.00 0.720 1,682.02 68.20%
OCTOBER 1993 10.94 0.704 1,680.54 68.05%
NOVEMBER 1993 10.82 0.704 1,669.73 66.97%
DECEMBER 1993 10.92 1.166 1,697.89 69.79%
JANUARY 1994 10.92 0.681 1,705.33 70.53%
FEBRUARY 1994 10.72 0.727 1,681.89 68.19%
MARCH 1994 10.52 0.723 1,658.12 65.81%
APRIL 1994 10.38 0.780 1,644.16 64.42%
MAY 1994 10.35 0.764 1,647.31 64.73%
JUNE 1994 10.35 0.763 1,655.21 65.52%
JULY 1994 10.35 0.790 1,663.38 66.34%
AUGUST 1994 10.34 0.788 1,669.92 66.99%
SEPTEMBER 1994 10.23 0.832 1,660.66 66.07%
OCTOBER 1994 10.07 0.773 1,642.47 64.25%
NOVEMBER 1994 9.78 0.858 1,603.56 60.36%
DECEMBER 1994 9.97 0.865 1,643.34 64.33%
JANUARY 1995 10.10 0.820 1,673.05 67.30%
FEBRUARY 1995 10.33 0.780 1,719.21 71.92%
MARCH 1995 10.41 0.832 1,741.19 74.12%
APRIL 1995 10.41 0.805 1,749.57 74.96%
MAY 1995 10.52 0.802 1,776.49 77.65%
JUNE 1995 10.52 0.827 1,785.18 78.52%
JULY 1995 10.44 0.827 1,780.24 78.02%
AUGUST 1995 10.43 0.854 1,787.44 78.74%
SEPTEMBER 1995 10.45 0.790 1,799.13 79.91%
OCTOBER 1995 10.57 0.774 1,827.97 82.80%
NOVEMBER 1995 10.63 0.802 1,846.87 84.69%
DECEMBER 1995 10.69 0.779 1,865.63 86.56%
JANUARY 1996 10.68 0.789 1,872.31 87.23%
FEBRUARY 1996 10.62 0.819 1,870.49 87.05%
MARCH 1996 10.47 0.815 1,852.60 85.26%
APRIL 1996 10.44 0.818 1,855.84 85.58%
MAY 1996 10.46 0.873 1,868.52 86.85%
JUNE 1996 10.38 0.802 1,862.56 86.26%
JULY 1996 10.44 0.822 1,881.91 88.19%
AUGUST 1996 10.45 0.856 1,892.65 89.27%
SEPTEMBER 1996 10.48 0.859 1,907.09 90.71%
OCTOBER 1996 10.47 0.891 1,914.60 91.46%
NOVEMBER 1996 10.60 0.828 1,947.15 94.71%
DECEMBER 1996 10.57 0.835 1,950.46 95.05%
JANUARY 1997 10.46 0.877 1,939.34 93.93%
FEBRUARY 1997 10.59 0.810 1,972.02 97.20%
MARCH 1997 10.40 0.850 1,945.47 94.55%
APRIL 1997 10.37 0.915 1,949.35 94.94%
MAY 1997 10.47 0.845 1,977.00 97.70%
JUNE 1997 10.57 0.837 2,004.72 100.47%
JULY 1997 10.70 0.847 2,038.44 103.84%
AUGUST 1997 10.60 0.824 2,028.12 102.81%
SEPTEMBER 1997 10.68 0.816 2,052.14 105.21%
OCTOBER 1997 10.69 0.843 2,063.08 106.31%
NOVEMBER 1997 10.72 0.869 2,078.18 107.82%
DECEMBER 26, 1997 10.81 0.761 2,103.85 110.38%
DECEMBER 31, 1997 10.81 0.136 2,105.31 110.53%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class A Shares)
INCEPTION AVG. ANNUAL TOTAL RETURN AS OF 12/31/97 7.20%
INCEPTION CUMULATIVE TOTAL RETURN AS OF 12/31/97 109.26%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $9.60 As of 5/21/87
Public Offering Price Per Share (POP) $10.00 As of 5/21/87
Number of Shares Purchased 100.000 Based on POP
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
JUNE 1987 1,000.00 100.000 0.00162700 0.16
JULY 1987 961.16 100.017 0.00595600 0.60
AUGUST 1987 964.76 100.079 0.03875100 3.88
SEPTEMBER 1987 972.64 100.479 0.05771400 5.80
OCTOBER 1987 935.23 101.106 0.05561900 5.62
NOVEMBER 1987 916.59 101.730 0.05601800 5.70
DECEMBER 1987 936.53 102.353 0.05856700 5.99
JANUARY 1988 953.79 103.001 0.05394000 5.56
FEBRUARY 1988 995.39 103.579 0.05760400 5.97
MARCH 1988 1,003.43 104.198 0.05843900 6.09
APRIL 1988 995.97 104.839 0.05395700 5.66
MAY 1988 994.29 105.439 0.05850400 6.17
JUNE 1988 985.70 106.103 0.05580500 5.92
JULY 1988 1,017.08 106.724 0.05319000 5.68
AUGUST 1988 1,020.63 107.321 0.06111200 6.56
SEPTEMBER 1988 1,030.40 108.009 0.05694700 6.15
OCTOBER 1988 1,047.36 108.647 0.05856300 6.36
NOVEMBER 1988 1,063.50 109.301 0.05541900 6.06
DECEMBER 1988 1,052.07 109.934 0.05641800 6.20
JANUARY 1989 1,053.87 110.585 0.06121000 6.77
FEBRUARY 1989 1,079.44 111.282 0.05268300 5.86
MARCH 1989 1,071.95 111.894 0.05938900 6.65
APRIL 1989 1,075.24 112.590 0.05329500 6.00
MAY 1989 1,095.87 113.210 0.06329600 7.17
JUNE 1989 1,130.21 113.932 0.05424800 6.18
JULY 1989 1,143.23 114.552 0.05242100 6.00
AUGUST 1989 1,153.81 115.151 0.06111000 7.04
SEPTEMBER 1989 1,152.79 115.858 0.05516100 6.39
OCTOBER 1989 1,144.12 116.509 0.05541500 6.46
NOVEMBER 1989 1,159.90 117.161 0.06216800 7.28
DECEMBER 1989 1,176.55 117.891 0.05435300 6.41
JANUARY 1990 1,193.57 118.527 0.05577000 6.61
FEBRUARY 1990 1,190.70 119.189 0.06008700 7.16
MARCH 1990 1,188.33 119.912 0.05240900 6.28
APRIL 1990 1,194.61 120.546 0.05648600 6.81
MAY 1990 1,191.78 121.239 0.05472300 6.63
JUNE 1990 1,202.05 121.911 0.05752500 7.01
JULY 1990 1,215.16 122.619 0.05635800 6.91
AUGUST 1990 1,230.65 123.312 0.05611500 6.92
SEPTEMBER 1990 1,222.77 124.013 0.05659000 7.02
OCTOBER 1990 1,226.07 124.727 0.05904200 7.36
NOVEMBER 1990 1,225.95 125.481 0.05934600 7.45
DECEMBER 1990 1,252.22 126.232 0.05568700 7.03
JANUARY 1991 1,269.35 126.935 0.05498400 6.98
FEBRUARY 1991 1,276.33 127.633 0.05817600 7.43
MARCH 1991 1,295.24 128.369 0.05428700 6.97
APRIL 1991 1,288.09 129.067 0.05570600 7.19
MAY 1991 1,301.73 129.784 0.05317000 6.90
JUNE 1991 1,312.52 130.470 0.05732400 7.48
JULY 1991 1,314.78 131.216 0.05672100 7.44
AUGUST 1991 1,335.35 131.951 0.05816200 7.67
SEPTEMBER 1991 1,348.30 132.707 0.05442800 7.22
OCTOBER 1991 1,366.14 133.412 0.05416500 7.23
NOVEMBER 1991 1,377.37 134.116 0.05594000 7.50
DECEMBER 1991 1,382.19 134.848 0.05619200 7.58
JANUARY 1992 1,403.25 135.580 0.05854500 7.94
FEBRUARY 1992 1,419.32 136.342 0.05525300 7.53
MARCH 1992 1,417.31 137.071 0.05471900 7.50
APRIL 1992 1,419.33 137.799 0.05537800 7.63
MAY 1992 1,431.10 138.538 0.05395100 7.47
JUNE 1992 1,445.50 139.258 0.05391500 7.51
JULY 1992 1,468.32 139.974 0.05662800 7.93
AUGUST 1992 1,511.24 140.712 0.05424600 7.63
SEPTEMBER 1992 1,492.14 141.435 0.05378200 7.61
OCTOBER 1992 1,503.99 142.154 0.05470100 7.78
NOVEMBER 1992 1,481.91 142.904 0.05274800 7.54
DECEMBER 1992 1,515.17 143.618 0.14459500 20.77
JANUARY 1993 1,527.32 145.598 0.05266500 7.67
FEBRUARY 1993 1,543.73 146.325 0.05278300 7.72
MARCH 1993 1,590.96 147.039 0.05237700 7.70
APRIL 1993 1,576.60 147.761 0.05153900 7.62
MAY 1993 1,591.61 148.471 0.05132900 7.62
JUNE 1993 1,603.68 149.180 0.05198700 7.76
JULY 1993 1,623.37 149.896 0.04980100 7.46
AUGUST 1993 1,623.34 150.588 0.04950700 7.46
SEPTEMBER 1993 1,651.88 151.271 0.05201400 7.87
OCTOBER 1993 1,671.85 151.986 0.05035700 7.65
NOVEMBER 1993 1,670.39 152.686 0.04959600 7.57
DECEMBER 1993 1,659.64 153.386 0.08250300 12.65
JANUARY 1994 1,687.63 154.545 0.04781900 7.39
FEBRUARY 1994 1,695.02 155.222 0.04993700 7.75
MARCH 1994 1,671.73 155.945 0.04849600 7.56
APRIL 1994 1,648.10 156.663 0.05139600 8.05
MAY 1994 1,634.22 157.439 0.04990200 7.86
JUNE 1994 1,637.35 158.198 0.04961200 7.85
JULY 1994 1,645.20 158.957 0.05110400 8.12
AUGUST 1994 1,653.32 159.741 0.05069200 8.10
SEPTEMBER 1994 1,659.82 160.525 0.05267600 8.46
OCTOBER 1994 1,650.62 161.351 0.04797200 7.74
NOVEMBER 1994 1,632.55 162.120 0.05143200 8.34
DECEMBER 1994 1,593.87 162.972 0.05258700 8.57
JANUARY 1995 1,633.40 163.832 0.05023900 8.23
FEBRUARY 1995 1,662.93 164.647 0.04867200 8.01
MARCH 1995 1,708.82 165.423 0.05205600 8.61
APRIL 1995 1,730.66 166.250 0.05010500 8.33
MAY 1995 1,738.99 167.050 0.05017600 8.38
JUNE 1995 1,765.75 167.847 0.05149600 8.64
JULY 1995 1,774.39 168.668 0.05089400 8.58
AUGUST 1995 1,769.48 169.491 0.05222900 8.85
SEPTEMBER 1995 1,776.64 170.339 0.04817300 8.21
OCTOBER 1995 1,788.25 171.125 0.04754400 8.14
NOVEMBER 1995 1,816.92 171.894 0.04927400 8.47
DECEMBER 1995 1,835.71 172.691 0.04795500 8.28
JANUARY 1996 1,854.35 173.466 0.04828300 8.38
FEBRUARY 1996 1,860.99 174.250 0.04961200 8.64
MARCH 1996 1,859.18 175.064 0.04847300 8.49
APRIL 1996 1,841.41 175.875 0.04827700 8.49
MAY 1996 1,844.62 176.688 0.05134800 9.07
JUNE 1996 1,857.23 177.555 0.04662400 8.28
JULY 1996 1,851.30 178.353 0.04781339 8.53
AUGUST 1996 1,870.53 179.170 0.04963130 8.89
SEPTEMBER 1996 1,881.21 180.021 0.04970831 8.95
OCTOBER 1996 1,895.56 180.874 0.05126172 9.27
NOVEMBER 1996 1,903.03 181.760 0.04799971 8.72
DECEMBER 1996 1,935.38 182.583 0.04802775 8.77
JANUARY 1997 1,938.67 183.413 0.04971435 9.12
FEBRUARY 1997 1,927.61 184.284 0.04627397 8.53
MARCH 1997 1,960.10 185.090 0.04744845 8.78
APRIL 1997 1,933.71 185.934 0.05072392 9.43
MAY 1997 1,937.57 186.844 0.04707200 8.80
JUNE 1997 1,965.05 187.684 0.04683772 8.79
JULY 1997 1,992.61 188.515 0.04775968 9.00
AUGUST 1997 2,026.12 189.357 0.04583321 8.68
SEPTEMBER 1997 2,015.86 190.175 0.04556339 8.67
OCTOBER 1997 2,039.74 190.987 0.04689972 8.96
NOVEMBER 1997 2,050.61 191.825 0.04825164 9.26
DECEMBER 26, 1997 2,065.62 192.688 0.04241100 8.17
DECEMBER 31, 1997 2,091.13 193.444 0.00754308 1.46
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
JUNE 1987 9.61 0.017 961.16 -3.88%
JULY 1987 9.64 0.062 964.76 -3.52%
AUGUST 1987 9.68 0.401 972.64 -2.74%
SEPTEMBER 1987 9.25 0.627 935.23 -6.48%
OCTOBER 1987 9.01 0.624 916.59 -8.34%
NOVEMBER 1987 9.15 0.623 936.53 -6.35%
DECEMBER 1987 9.26 0.647 953.79 -4.62%
JANUARY 1988 9.61 0.578 995.39 -0.46%
FEBRUARY 1988 9.63 0.620 1,003.43 0.34%
MARCH 1988 9.50 0.641 995.97 -0.40%
APRIL 1988 9.43 0.600 994.29 -0.57%
MAY 1988 9.29 0.664 985.70 -1.43%
JUNE 1988 9.53 0.621 1,017.08 1.71%
JULY 1988 9.51 0.597 1,020.63 2.06%
AUGUST 1988 9.54 0.687 1,030.40 3.04%
SEPTEMBER 1988 9.64 0.638 1,047.36 4.74%
OCTOBER 1988 9.73 0.654 1,063.50 6.35%
NOVEMBER 1988 9.57 0.633 1,052.07 5.21%
DECEMBER 1988 9.53 0.651 1,053.87 5.39%
JANUARY 1989 9.70 0.698 1,079.44 7.94%
FEBRUARY 1989 9.58 0.612 1,071.95 7.19%
MARCH 1989 9.55 0.696 1,075.24 7.52%
APRIL 1989 9.68 0.620 1,095.87 9.59%
MAY 1989 9.92 0.722 1,130.21 13.02%
JUNE 1989 9.98 0.619 1,143.23 14.32%
JULY 1989 10.02 0.599 1,153.81 15.38%
AUGUST 1989 9.95 0.707 1,152.79 15.28%
SEPTEMBER 1989 9.82 0.651 1,144.12 14.41%
OCTOBER 1989 9.90 0.652 1,159.90 15.99%
NOVEMBER 1989 9.98 0.730 1,176.55 17.66%
DECEMBER 1989 10.07 0.636 1,193.57 19.36%
JANUARY 1990 9.99 0.662 1,190.70 19.07%
FEBRUARY 1990 9.91 0.723 1,188.33 18.83%
MARCH 1990 9.91 0.634 1,194.61 19.46%
APRIL 1990 9.83 0.693 1,191.78 19.18%
MAY 1990 9.86 0.673 1,202.05 20.20%
JUNE 1990 9.91 0.708 1,215.16 21.52%
JULY 1990 9.98 0.692 1,230.65 23.06%
AUGUST 1990 9.86 0.702 1,222.77 22.28%
SEPTEMBER 1990 9.83 0.714 1,226.07 22.61%
OCTOBER 1990 9.77 0.754 1,225.95 22.59%
NOVEMBER 1990 9.92 0.751 1,252.22 25.22%
DECEMBER 1990 10.00 0.703 1,269.35 26.93%
JANUARY 1991 10.00 0.698 1,276.33 27.63%
FEBRUARY 1991 10.09 0.736 1,295.24 29.52%
MARCH 1991 9.98 0.698 1,288.09 28.81%
APRIL 1991 10.03 0.717 1,301.73 30.17%
MAY 1991 10.06 0.686 1,312.52 31.25%
JUNE 1991 10.02 0.746 1,314.78 31.48%
JULY 1991 10.12 0.735 1,335.35 33.53%
AUGUST 1991 10.16 0.755 1,348.30 34.83%
SEPTEMBER 1991 10.24 0.705 1,366.14 36.61%
OCTOBER 1991 10.27 0.704 1,377.37 37.74%
NOVEMBER 1991 10.25 0.732 1,382.19 38.22%
DECEMBER 1991 10.35 0.732 1,403.25 40.33%
JANUARY 1992 10.41 0.762 1,419.32 41.93%
FEBRUARY 1992 10.34 0.729 1,417.31 41.73%
MARCH 1992 10.30 0.728 1,419.33 41.93%
APRIL 1992 10.33 0.739 1,431.10 43.11%
MAY 1992 10.38 0.720 1,445.50 44.55%
JUNE 1992 10.49 0.716 1,468.32 46.83%
JULY 1992 10.74 0.738 1,511.24 51.12%
AUGUST 1992 10.55 0.724 1,492.14 49.21%
SEPTEMBER 1992 10.58 0.719 1,503.99 50.40%
OCTOBER 1992 10.37 0.750 1,481.91 48.19%
NOVEMBER 1992 10.55 0.714 1,515.17 51.52%
DECEMBER 1992 10.49 1.980 1,527.32 52.73%
JANUARY 1993 10.55 0.727 1,543.73 54.37%
FEBRUARY 1993 10.82 0.714 1,590.96 59.10%
MARCH 1993 10.67 0.722 1,576.60 57.66%
APRIL 1993 10.72 0.710 1,591.61 59.16%
MAY 1993 10.75 0.709 1,603.68 60.37%
JUNE 1993 10.83 0.716 1,623.37 62.34%
JULY 1993 10.78 0.692 1,623.34 62.33%
AUGUST 1993 10.92 0.683 1,651.88 65.19%
SEPTEMBER 1993 11.00 0.715 1,671.85 67.19%
OCTOBER 1993 10.94 0.700 1,670.39 67.04%
NOVEMBER 1993 10.82 0.700 1,659.64 65.96%
DECEMBER 1993 10.92 1.159 1,687.63 68.76%
JANUARY 1994 10.92 0.677 1,695.02 69.50%
FEBRUARY 1994 10.72 0.723 1,671.73 67.17%
MARCH 1994 10.52 0.719 1,648.10 64.81%
APRIL 1994 10.38 0.776 1,634.22 63.42%
MAY 1994 10.35 0.759 1,637.35 63.74%
JUNE 1994 10.35 0.758 1,645.20 64.52%
JULY 1994 10.35 0.785 1,653.32 65.33%
AUGUST 1994 10.34 0.783 1,659.82 65.98%
SEPTEMBER 1994 10.23 0.827 1,650.62 65.06%
OCTOBER 1994 10.07 0.769 1,632.55 63.25%
NOVEMBER 1994 9.78 0.853 1,593.87 59.39%
DECEMBER 1994 9.97 0.860 1,633.40 63.34%
JANUARY 1995 10.10 0.815 1,662.93 66.29%
FEBRUARY 1995 10.33 0.776 1,708.82 70.88%
MARCH 1995 10.41 0.827 1,730.66 73.07%
APRIL 1995 10.41 0.800 1,738.99 73.90%
MAY 1995 10.52 0.797 1,765.75 76.57%
JUNE 1995 10.52 0.822 1,774.39 77.44%
JULY 1995 10.44 0.822 1,769.48 76.95%
AUGUST 1995 10.43 0.849 1,776.64 77.66%
SEPTEMBER 1995 10.45 0.785 1,788.25 78.83%
OCTOBER 1995 10.57 0.770 1,816.92 81.69%
NOVEMBER 1995 10.63 0.797 1,835.71 83.57%
DECEMBER 1995 10.69 0.775 1,854.35 85.44%
JANUARY 1996 10.68 0.784 1,860.99 86.10%
FEBRUARY 1996 10.62 0.814 1,859.18 85.92%
MARCH 1996 10.47 0.810 1,841.41 84.14%
APRIL 1996 10.44 0.813 1,844.62 84.46%
MAY 1996 10.46 0.867 1,857.23 85.72%
JUNE 1996 10.38 0.798 1,851.30 85.13%
JULY 1996 10.44 0.817 1,870.53 87.05%
AUGUST 1996 10.45 0.851 1,881.21 88.12%
SEPTEMBER 1996 10.48 0.854 1,895.56 89.56%
OCTOBER 1996 10.47 0.886 1,903.03 90.30%
NOVEMBER 1996 10.60 0.823 1,935.38 93.54%
DECEMBER 1996 10.57 0.830 1,938.67 93.87%
JANUARY 1997 10.46 0.872 1,927.61 92.76%
FEBRUARY 1997 10.59 0.805 1,960.10 96.01%
MARCH 1997 10.40 0.844 1,933.71 93.37%
APRIL 1997 10.37 0.909 1,937.57 93.76%
MAY 1997 10.47 0.840 1,965.05 96.50%
JUNE 1997 10.57 0.832 1,992.61 99.26%
JULY 1997 10.70 0.841 2,026.12 102.61%
AUGUST 1997 10.60 0.819 2,015.86 101.59%
SEPTEMBER 1997 10.68 0.811 2,039.74 103.97%
OCTOBER 1997 10.69 0.838 2,050.61 105.06%
NOVEMBER 1997 10.72 0.863 2,065.62 106.56%
DECEMBER 26, 1997 10.81 0.756 2,091.13 109.11%
DECEMBER 31, 1997 10.81 0.135 2,092.59 109.26%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class C Shares)
INCEPTION AVG. ANNUAL TOTAL RETURN AS OF 12/31/97 6.81%
INCEPTION CUMULATIVE TOTAL RETURN AS OF 12/31/97 12.22%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $10.47 As of 4/1/96
(Commencement of Class)
Number of Shares Purchased 95.511 Based on NAV
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
APRIL 1996 1,000.00 95.511 0.03762000 * 3.59
MAY 1996 998.82 95.856 0.06668500 6.39
JUNE 1996 1,009.04 96.467 0.04819900 4.65
JULY 1996 1,005.98 96.915 0.03956402 3.83
AUGUST 1996 1,015.63 97.282 0.04210762 4.10
SEPTEMBER 1996 1,020.69 97.674 0.04200403 4.10
OCTOBER 1996 1,027.73 98.066 0.04339708 4.26
NOVEMBER 1996 1,031.00 98.472 0.04068724 4.01
DECEMBER 1996 1,047.81 98.850 0.03880967 3.84
JANUARY 1997 1,048.68 99.213 0.04189399 4.16
FEBRUARY 1997 1,041.92 99.610 0.03911161 3.90
MARCH 1997 1,058.77 99.978 0.03997977 4.00
APRIL 1997 1,044.77 100.362 0.04298493 4.31
MAY 1997 1,045.07 100.778 0.03964537 4.00
JUNE 1997 1,059.14 101.160 0.03935093 3.98
JULY 1997 1,073.24 101.536 0.04002859 4.06
AUGUST 1997 1,090.50 101.916 0.03839579 3.91
SEPTEMBER 1997 1,084.23 102.285 0.03810463 3.90
OCTOBER 1997 1,096.31 102.650 0.03910956 4.01
NOVEMBER 1997 1,101.35 103.026 0.04027602 4.15
DECEMBER 26, 1997 1,107.56 103.413 0.03534376 3.66
DECEMBER 31, 1997 1,121.55 103.751 0.00628481 0.65
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
APRIL 1996 10.42 0.345 998.82 -0.12%
MAY 1996 10.46 0.611 1,009.04 0.90%
JUNE 1996 10.38 0.448 1,005.98 0.60%
JULY 1996 10.44 0.367 1,015.63 1.56%
AUGUST 1996 10.45 0.392 1,020.69 2.07%
SEPTEMBER 1996 10.48 0.391 1,027.73 2.77%
OCTOBER 1996 10.47 0.406 1,031.00 3.10%
NOVEMBER 1996 10.60 0.378 1,047.81 4.78%
DECEMBER 1996 10.57 0.363 1,048.68 4.87%
JANUARY 1997 10.46 0.397 1,041.92 4.19%
FEBRUARY 1997 10.59 0.368 1,058.77 5.88%
MARCH 1997 10.41 0.384 1,044.77 4.48%
APRIL 1997 10.37 0.416 1,045.07 4.51%
MAY 1997 10.47 0.382 1,059.14 5.91%
JUNE 1997 10.57 0.377 1,073.24 7.32%
JULY 1997 10.70 0.380 1,090.50 9.05%
AUGUST 1997 10.60 0.369 1,084.23 8.42%
SEPTEMBER 1997 10.68 0.365 1,096.31 9.63%
OCTOBER 1997 10.69 0.376 1,101.35 10.13%
NOVEMBER 1997 10.71 0.387 1,107.56 10.76%
DECEMBER 26, 1997 10.81 0.338 1,121.55 12.16%
DECEMBER 31, 1997 10.81 0.060 1,122.21 12.22%
<FN>
* For the period 4/1/96-4/26/96
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
T O T A L R E T U R N B A S E D O N P O P
Churchill Tax-Free Fund of Kentucky (Class Y Shares)
INCEPTION AVG. ANNUAL TOTAL RETURN AS OF 12/31/97 7.78%
INCEPTION CUMULATIVE TOTAL RETURN AS OF 12/31/97 14.02%
Initial Investment $1,000
Net Asset Value Per Share (NAV) $10.47 As of 4/1/96
(Commencement of Class)
Number of Shares Purchased 95.511 Based on NAV
INVESTMENT NUMBER PERIOD PERIOD
@ BEGINNING OF DIVIDEND $
OF PERIOD SHARES FACTOR DIVIDEND
<S> <C> <C> <C> <C>
APRIL 1996 1,000.00 95.511 0.03769200 3.60
MAY 1996 1,000.73 95.856 0.06106200 5.85
JUNE 1996 1,008.50 96.415 0.04790800 4.62
JULY 1996 1,005.41 96.860 0.04944324 4.79
AUGUST 1996 1,016.01 97.319 0.05760423 5.61
SEPTEMBER 1996 1,017.72 97.858 0.05114842 5.01
OCTOBER 1996 1,030.56 98.336 0.05091882 5.01
NOVEMBER 1996 1,039.50 98.812 0.04977067 4.92
DECEMBER 1996 1,054.30 99.275 0.05098197 5.06
JANUARY 1997 1,052.41 99.755 0.05103496 5.09
FEBRUARY 1997 1,053.51 100.239 0.04590056 4.60
MARCH 1997 1,062.12 100.675 0.05037598 5.07
APRIL 1997 1,053.10 101.162 0.04883800 4.94
MAY 1997 1,059.05 101.636 0.05005317 5.09
JUNE 1997 1,072.27 102.121 0.04836911 4.94
JULY 1997 1,082.31 102.589 0.04920131 5.05
AUGUST 1997 1,105.83 103.059 0.04883830 5.03
SEPTEMBER 1997 1,099.52 103.533 0.04705365 4.87
OCTOBER 1997 1,110.61 103.990 0.04819268 5.01
NOVEMBER 1997 1,117.70 104.458 0.04649065 4.86
DECEMBER 1997 1,124.65 104.911 0.04832543 5.07
<CAPTION>
ENDING
NET ASSET INVESTMENT CUMULATIVE
VALUE PER DIVIDEND @ END TOTAL
SHARE SHARES OF PERIOD RETURN
<S> <C> <C> <C> <C>
APRIL 1996 10.44 0.345 1,000.73 0.07%
MAY 1996 10.46 0.560 1,008.50 0.85%
JUNE 1996 10.38 0.445 1,005.41 0.54%
JULY 1996 10.44 0.459 1,016.01 1.60%
AUGUST 1996 10.40 0.539 1,017.72 1.77%
SEPTEMBER 1996 10.48 0.478 1,030.56 3.06%
OCTOBER 1996 10.52 0.476 1,039.50 3.95%
NOVEMBER 1996 10.62 0.463 1,054.30 5.43%
DECEMBER 1996 10.55 0.480 1,052.41 5.24%
JANUARY 1997 10.51 0.484 1,053.51 5.35%
FEBRUARY 1997 10.55 0.436 1,062.12 6.21%
MARCH 1997 10.41 0.487 1,053.10 5.31%
APRIL 1997 10.42 0.474 1,059.05 5.91%
MAY 1997 10.50 0.484 1,072.27 7.23%
JUNE 1997 10.55 0.468 1,082.31 8.23%
JULY 1997 10.73 0.470 1,105.83 10.58%
AUGUST 1997 10.62 0.474 1,099.52 9.95%
SEPTEMBER 1997 10.68 0.456 1,110.61 11.06%
OCTOBER 1997 10.70 0.468 1,117.70 11.77%
NOVEMBER 1997 10.72 0.453 1,124.65 12.46%
DECEMBER 1997 10.82 0.469 1,140.21 14.02%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Taxable Equivalent Yield
Churchill Tax-Free Fund of Kentucky
Class A
<S> <C>
y Yield (Pre-tax) 0.0416
Fe Percent Exempt From Federal Tax 0.9719
F Federal Tax Rate 0.396
S State Tax Rate 0.06
Y Taxable Equivalent Yield 0.0724
Formula Y = ((y*Fe)/(1-(F+S*(1-F))))+(y*(1-Fe))
</TABLE>
----------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Taxable Equivalent Yield
Churchill Tax-Free Fund of Kentucky
Class C
<S> <C>
y Yield (Pre-tax) 0.0348
Fe Percent Exempt From Federal Tax 0.9719
F Federal Tax Rate 0.396
S State Tax Rate 0.06
Y Taxable Equivalent Yield 0.0605
Formula Y = ((y*Fe)/(1-(F+S*(1-F))))+(y*(1-Fe))
</TABLE>
----------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Taxable Equivalent Yield
Churchill Tax-Free Fund of Kentucky
Class Y
<S> <C>
y Yield (Pre-tax) 0.0449
Fe Percent Exempt From Federal Tax 0.9719
F Federal Tax Rate 0.396
S State Tax Rate 0.06
Y Taxable Equivalent Yield 0.0781
Formula Y = ((y*Fe)/(1-(F+S*(1-F))))+(y*(1-Fe))
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Churchill Tax-Free Fund of Kentucky
Class A
SEC Yield
12/31/97
<S> <C>
Dividend and Interest Income 945,691.46
Expenses Accrued for Period 133,705.79
Avg. Daily Shares Outstanding 20,965,497.169
Maximum Offering Price 11.26
Yield 4.16
</TABLE>
-------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Churchill Tax-Free Fund of Kentucky
Class C
SEC Yield
12/31/97
<S> <C>
Dividend and Interest Income 3,328.81
Expenses Accrued for Period 1,029.57
Avg. Daily Shares Outstanding 73,821.783
Maximum Offering Price 10.81
Yield 3.48
</TABLE>
-------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Churchill Tax-Free Fund of Kentucky
Class Y
SEC Yield
12/31/97
<S> <C>
Dividend and Interest Income 36,463.51
Expenses Accrued for Period 4,081.65
Avg. Daily Shares Outstanding 807,956.723
Maximum Offering Price 10.82
Yield 4.49
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's Annual report dated December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000812006
<NAME> CHURCHILL TAX-FREE FUND OF KENTUCKY, CLASS A SHARES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 217,343,230
<INVESTMENTS-AT-VALUE> 232,298,046
<RECEIVABLES> 4,826,631
<ASSETS-OTHER> 8,190
<OTHER-ITEMS-ASSETS> 84,873
<TOTAL-ASSETS> 237,217,740
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 938,440
<TOTAL-LIABILITIES> 938,440
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,196,378
<SHARES-COMMON-STOCK> 20,951,105
<SHARES-COMMON-PRIOR> 21,134,263
<ACCUMULATED-NII-CURRENT> 7,774
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 120,332
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,954,816
<NET-ASSETS> 226,476,719
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,628,874
<OTHER-INCOME> 0
<EXPENSES-NET> 1,667,418
<NET-INVESTMENT-INCOME> 11,982,164
<REALIZED-GAINS-CURRENT> 690,738
<APPREC-INCREASE-CURRENT> 5,384,972
<NET-CHANGE-FROM-OPS> 18,057,874
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,553,536
<DISTRIBUTIONS-OF-GAINS> 332,819
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,946,573
<NUMBER-OF-SHARES-REDEEMED> 2,759,392
<SHARES-REINVESTED> 629,661
<NET-CHANGE-IN-ASSETS> 7,134,303
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 322,582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,667,418
<AVERAGE-NET-ASSETS> 222,367,935
<PER-SHARE-NAV-BEGIN> 10.55
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> .27
<PER-SHARE-DIVIDEND> .55
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> .73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's Annual report dated December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000812006
<NAME> CHURCHILL TAX-FREE FUND OF KENTUCKY, CLASS C SHARES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 217,343,230
<INVESTMENTS-AT-VALUE> 232,298,046
<RECEIVABLES> 4,826,631
<ASSETS-OTHER> 8,190
<OTHER-ITEMS-ASSETS> 84,873
<TOTAL-ASSETS> 237,217,740
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 938,440
<TOTAL-LIABILITIES> 938,440
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,196,378
<SHARES-COMMON-STOCK> 78,195
<SHARES-COMMON-PRIOR> 41,087
<ACCUMULATED-NII-CURRENT> 7,774
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 120,332
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,954,816
<NET-ASSETS> 845,124
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,628,874
<OTHER-INCOME> 0
<EXPENSES-NET> 1,667,418
<NET-INVESTMENT-INCOME> 11,982,164
<REALIZED-GAINS-CURRENT> 690,738
<APPREC-INCREASE-CURRENT> 5,384,972
<NET-CHANGE-FROM-OPS> 18,057,874
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29,337
<DISTRIBUTIONS-OF-GAINS> 845
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 47,349
<NUMBER-OF-SHARES-REDEEMED> 12,332
<SHARES-REINVESTED> 2,091
<NET-CHANGE-IN-ASSETS> 7,134,303
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 322,582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,667,418
<AVERAGE-NET-ASSETS> 677,893
<PER-SHARE-NAV-BEGIN> 10.55
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> .27
<PER-SHARE-DIVIDEND> .46
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's Annual report dated December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000812006
<NAME> CHURCHILL TAX-FREE FUND OF KENTUCKY, CLASS Y SHARES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 217,343,230
<INVESTMENTS-AT-VALUE> 232,298,046
<RECEIVABLES> 4,826,631
<ASSETS-OTHER> 8,190
<OTHER-ITEMS-ASSETS> 84,873
<TOTAL-ASSETS> 237,217,740
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 938,440
<TOTAL-LIABILITIES> 938,440
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 221,196,378
<SHARES-COMMON-STOCK> 828,219
<SHARES-COMMON-PRIOR> 551,863
<ACCUMULATED-NII-CURRENT> 7,774
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 120,332
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,954,816
<NET-ASSETS> 8,957,457
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,628,874
<OTHER-INCOME> 0
<EXPENSES-NET> 1,667,418
<NET-INVESTMENT-INCOME> 11,982,164
<REALIZED-GAINS-CURRENT> 690,738
<APPREC-INCREASE-CURRENT> 5,384,972
<NET-CHANGE-FROM-OPS> 18,057,874
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 391,517
<DISTRIBUTIONS-OF-GAINS> 11,278
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 387,049
<NUMBER-OF-SHARES-REDEEMED> 112,210
<SHARES-REINVESTED> 1,517
<NET-CHANGE-IN-ASSETS> 7,134,303
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 322,582
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,667,418
<AVERAGE-NET-ASSETS> 7,380,076
<PER-SHARE-NAV-BEGIN> 10.55
<PER-SHARE-NII> .56
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> .57
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.82
<EXPENSE-RATIO> .56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
TAX-FREE FUND OF COLORADO
Rule 18f-3
Multiple Class Plan
TAX-FREE FUND OF COLORADO (the "Fund") has elected to
rely on Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), in offering multiple classes of shares
with differing distribution arrangements, voting rights and
expense allocations.
Pursuant to Rule 18f-3, the Board of Trustees of the
Fund has approved and adopted this written plan (the "Plan")
specifying all of the differences among the classes of shares to
be offered by the Fund. Prior to such offering, the Plan will be
filed as an exhibit to the Fund's registration statement. The
Plan sets forth the differences among the classes, including
shareholder services, distribution arrangements, expense
allocations, and conversion or exchange options.
I. Attributes of Share Classes
This section discusses the attributes of the various
classes of shares. Each share of the Fund represents an equal
pro rata interest in the Fund and has identical voting rights,
powers, qualifications, terms and conditions and, in proportion
to each share's net asset value, liquidation rights and
preferences. Each class differs in that: (a) each class has a
different class designation; (b) only the Front-Payment Class
Shares are subject to a front-end sales charge ("FESC"); (c) only
the Level-Payment and certain Front-Payment Class Shares are
subject to a contingent deferred sales charge ("CDSC"); (d) only
the Front-Payment Class Shares, Level-Payment Class Shares and
Financial Intermediary Shares (as described below) are subject to
distribution fees under a plan adopted pursuant to Rule 12b-1
under the 1940 Act (a "Rule 12b-1 Plan"), the distribution fees
for the Level-Payment Class and Financial Intermediary Class
being higher than that for the Front-Payment Class; (e) only the
Level-Payment Class Shares and Financial Intermediary Shares are
subject to a shareholder servicing fee under a non-Rule 12b-1
shareholder services plan (a "Shareholder Services Plan"); (f) to
the extent that one class alone is affected by a matter submitted
to a vote of the shareholders, then only that class has voting
power on the matter, provided, however, that any class whose
shares convert automatically to shares of another class also
votes separately with respect to class-specific Rule 12b-1
matters applying to the latter class; (g) the expenses
attributable to a specific class ("Class Expenses")* are borne
only by shares of that class on a pro-rata basis; and (h)
exchange privileges and conversion features may vary among the
classes.
*Class Expenses are limited to (i) transfer agency fees; (ii)
preparation and mailing expenses for shareholder communications
required by law, sent to current shareholders of a class; (iii)
state Blue Sky registration fees; (iv) Securities and Exchange
Commission ("SEC") registration fees; (v) trustees' fees; (vi)
expenses incurred for periodic meetings of trustees or
shareholders; and (vii) legal and accounting fees, other than
fees for income tax return preparation or income tax advice.
A. Front-Payment Class Shares
Front-Payment Class Shares are sold to (1) retail customers
and (2) persons entitled to exchange into Front-Payment
Class Shares
under the exchange privileges of the Fund. Shares of the Fund
outstanding on the date that the different classes of shares were
first made available were be redesignated Front-Payment
Shares. Front-Payment Class Shares will also be issued upon
automatic conversion of Level-Payment Class Shares, as described
below.
1. Sales Loads. Front-Payment Class Shares are sold
subject to the current maximum FESC (with scheduled
variations or eliminations of the sales charge, as
permitted by the 1940 Act). Certain Front-Payment Class
Shares sold without a FESC are subject to a CDSC.
2. Distribution and Service Fees. Front-Payment Class
Shares are subject to a distribution fee pursuant to Part I
of the Fund's Rule 12b-1 Plan. They are not subject to
charges applicable to a Shareholder Services Plan.
3. Class Expenses. Class Expenses that are attributable
to the Front-Payment Class are allocated to that particular
class.
4. Exchange Privileges and Conversion Features. Front-
Payment Class Shares are exchangeable for Front-Payment
Class Shares issued by other funds sponsored by Aquila
Management Corporation and as may additionally be set forth
in the then current prospectus of the Fund. Front-Payment
Class Shares have no conversion features.
B. Level-Payment Class Shares
Level-Payment Class Shares are sold to (1) retail customers
and (2) persons entitled to exchange into Level-Payment Class
Shares under the exchange privileges of the Fund.
1. Sales Loads. Level-Payment Class Shares are sold
without the imposition of any FESC, but are subject to a
CDSC (with scheduled variations or eliminations of the sales
charge, as permitted by the 1940 Act).
2. Distribution and Service Fees. Level-Payment Class
Shares are subject to a distribution fee pursuant to Part
II of the Fund's Rule 12b-1 Plan and to a shareholder
servicing fee under a Shareholder Services Plan not to
exceed .25% of the average daily net assets of the Level-
Payment Class.
3. Class Expenses. Class Expenses that are attributable
to the Level-Payment Class are allocated to that particular
class.
4. Exchange Privileges and Conversion Features. Level-
Payment Class Shares are exchangeable for Level-Payment
Class Shares issued by other funds sponsored by Aquila
Management Corporation and as may additionally be set forth
in the then current prospectus of the Fund. After a period
of no greater than six years, Level-Payment Class Shares
automatically convert to Front-Payment Class Shares on the
basis of the relative net asset values of the two classes
without the imposition of any sales charge, fee, or other
charge, provided, however, that the expenses, including
distribution fees, for Front-Payment Class Shares are not
higher than the expenses, including distribution fees, for
Level-Payment Class Shares. If the amount of expenses,
including distribution fees, for the Front-Payment Class is
increased materially without approval of the shareholders of
the Level-Payment Class, a new class will be established --
on the same terms as apply to the Front-Payment Class prior
to such increase -- as the class into which Level-Payment
Class Shares automatically convert.
C. Institutional Class Shares
Institutional Class Shares are not offered to retail
customers but are sold only to (1) institutional investors
investing funds held in a fiduciary, advisory, agency, custodial
or other similar capacity and (2) persons entitled to exchange
into Institutional Class Shares under the exchange privileges of
the Fund.
1. Sales Loads. Institutional Class Shares are sold
without the imposition of any FESC, CDSC or any other sales
charge.
2. Distribution and Service Fees. Institutional Class
Shares are not subject to any distribution fee or
shareholder servicing fee.
3. Class Expenses. Class Expenses that are attributable
to the Institutional Class are allocated to that particular
class.
4. Exchange Privileges and Conversion Features.
Institutional Class Shares are exchangeable for
Institutional Class Shares issued by other funds sponsored
by Aquila Management Corporation and as may additionally be
set forth in the then current prospectus of the Fund.
Institutional Class Shares have no conversion features.
D. Financial Intermediary Class Shares
Financial Intermediary Class Shares are sold (1) only
through financial intermediaries with which Aquila Distributors,
Inc. has entered into sales agreements, and are not offered
directly to retail customers and (2) persons entitled to exchange
into Financial Intermediary Class Shares under the exchange
privileges of the Fund.
1. Sales Loads. Financial Intermediary Class Shares are
sold without the imposition of any FESC, CDSC or any other
sales charge.
2. Distribution and Service Fees. Financial Intermediary
Class Shares are subject to a distribution fee pursuant to
Part III of the Fund's Rule 12b-1 Plan and to a shareholder
servicing fee under a Shareholder Services Plan not to
exceed 0.25% of the average daily net assets of the
Financial Intermediary Class.
3. Class Expenses. Class Expenses that are attributable
to the Financial Intermediary Class are allocated to that
particular class.
4. Exchange Privileges . Financial Intermediary Shares
are exchangeable for Financial Intermediary Class Shares
issued by other funds sponsored by Aquila Management
Corporation to the extent that shares of such funds are sold
by the respective financial intermediaries, and as may
additionally be set forth in the then current prospectus of
the Fund.
E. Additional Classes
In the future, the Fund may offer additional classes of
shares which differ from the classes discussed above. However,
any additional classes of shares must be approved by the Board,
and the Plan must be amended to describe those classes.
II. Approval of Multiple Class Plan
The Board of the Fund, including a majority of the
independent Trustees, must approve the Plan initially. In
addition, the Board must approve any material changes to the
classes and the Plan prior to their implementation. The Board
must find that the Plan is in the best interests of each class
individually and the Fund as a whole. In making its findings,
the Board should focus on, among other things, the relationships
among the classes and examine potential conflicts of interest
among classes regarding the allocation of fees, services, waivers
and reimbursements of expenses, and voting rights. Most
significantly, the Board should evaluate the level of services
provided to each class and the cost of those services to ensure
that the services are appropriate and that the allocation of
expenses is reasonable. In accordance with the foregoing
provisions of this Section II, the Board of the Fund has approved
and adopted this Plan as of the date written above.
III. Dividends and Distributions
Because of the differences in fees paid under a Rule
12b-1 Plan and Shareholder Services Plan and the special
allocation of Class Expenses among the classes of shares of the
Fund, the dividends payable to shareholders of a class will
differ from the dividends payable to shareholders of one or more
of the other classes. Dividends paid to each class of shares in
the Fund will, however, be declared and paid at the same time
and, except for the differences in expenses listed above, will be
determined in the same manner and paid in the same amounts per
outstanding shares.
IV. Expense Allocations
The methodology and procedures for calculating the
net asset value and dividends and distributions of the various
classes of shares and the proper allocation of income and
expenses among the various classes of shares are set forth in the
Memorandum (together with exhibits) of Richard F. West,
Treasurer, dated November 24, 1995, revised September 1, 1997 and
entitled "Methodologies Used In Accounting For Multiple Class
Shares."
Dated October 31, 1997
